Long term dow prospects....


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Just thought it was about time we reflected on the dow ..... The Fib. plot shows great correlation and from that we can conclude that if the 62% fails there is an aweful lot of fresh air below.If you din't read tonight's report, the current Bear Flag should take us to a target of 9100 ish.


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Hi Chartman

It's very interesting to me that the target for the bear flag and the 62% retracement, are at the same level. From what Skim told me awhile ago (and please correct me if I'm wrong) the fact that support levels based on 2 different criteria, makes the support a lot stronger.

My personnal view is that 9000 is the major test point. It was support in October and November, as well as being a major psychological support. If this goes, then I can see a test of the September lows and the 8000 level.

Either way it's not looking too pretty :(
Hi Chartman,

I am new to this board but have been reading with great interest your daily Dow updates for the last few months ever since the lectures on how to trade the Dow.
I have to say that I have found TA a little difficult to get to grips with but I have recently purchased Bulkowski's Encylopedia of chart patterns and am hooked!

I was intrigued to see the trend lines that you have placed on the Dow chart above, since these would fit very nicely for a Descending broadening wedge which, according to Bulk... is a pretty good bullish formation (upside breakout in 79% of cases)whose target gain at present would stand at about 12100 (Highest high - lowest low added to highest high) once there had been an upward break. Yet you are predicting further losses. Are there not other types of formations that you can identify on the chart such as:-

1) Rising wedge starting with the low of Sept 11th. The top trendline has 2 touches in mid Oct and mid Nov. The bottom trendline has 3 touches, Sept 11th low, 1st Nov and 1st of Dec followed by a partial rise and downside breakout mid Dec. There is a pullback almost immediately, however the target from this formation is to fall back to the start of the formation which in this case is the low of Sept 11th. :-(

2) Flag in uptrend formed between beg Jan and mid Feb with upside breakout in mid Feb. This is a bullish formation with a target of about 10650 which was met in mid March. Yippee :))

3)Symmetrical Triangle Top. Now this is where it gets interesting. The top trendline is the same as you have used for your descending broadening wedge but the bottom trendline joins the low at the end of Jan with the low at the end of the first week of May. There is a downside breakout from this formation at the end of May/beg June. Downside breakouts occur in about 36.5% of STT's with a failure rate of only 6% suggesting that once the break has occured then the course is going to be down in the vast majority of cases. The target, using the measure rule is the difference between the highest high & the lowest low subtracted from the lowest low = 8393. Only 62% downside breakouts make the target compared to 81% of upside breakouts.

So which is it do you think? We have 2 bearish formations, both with targets between 8000 and 8500 that have met all the characteristics specified and both have broken out on the one hand, and on the other, one bullish formation which has not been completed yet with a target of 12100?

Interesting stuff eh?

The one thing that I am not sure of however is can you apply Bulkowski's observations to index charts?

Hi ubend,

V. interesting post in addition to chartmans. However, was wondering, any chance you could post some charts to supplement your viewpoints?

If you like, www.bigcharts.com and www.prophetfinance.com offer good charting tools. You can save the appropriate chart as a .bmp file, and then draw in the trendlines etc. in MS Paint.

Thanks for the post and interest U-Bend :) That's what it is like dealing with the dow- a load of U bends!. One of my observations with the DOW is that TA formations that one would expect to perform. fail to do so when the DOW is in a down trend. Reverse this, and you can say, with confidence, that if you see a particular formation- say a bull wedge, or an inverse head and shoulders, which fails, either the dow is in a down trend, or one is iminent.
I am a great believer in the statement " each chart has it's own characteristics" and the DOW certainly has it's own. The mention of longer term formations should not be taken as gospel, rather an examination of the possibilities, such as you have done. Once aware of these options, one is better placed to have a plan of action if A,B, or C happens. No one can predict the future, as we all know and "trade what you see" is the golden rule. So whether the dow tanks or flys is largely irrelevant, so long as we trade the trend and make some points.Should 9100 fail, we can bias our current thinking to "short", if we find support, then we move the bias to "long". By that I mean at a point of indescision, we would take our position according to the bias- but then that's gambling.... a whole different ball game and we shouldn't be going there.
Hi Dsmodi,

Sorry I didn't attach charts - it was my first post here & I didn't know how :eek: . Once I have put the trendlines on the chart and saved it as a .bmp how do I put it in the reply? :confused:

There was also another formation that I forgot to mention - a head and shoulders with the high of early jan as the L eft shoulder, the high of mid March as the head and the high of mid May as the R ight shoulder. The neck line joins the low of late Jan to the low of early May and the projected target would be about 8550

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Hi UBend and all

For me the head and shoulders pattern fails because, to me, there is no prior uptrend in order for it to be a true reversal pattern. As well as this, the right shoulder is higher than the left.

PS to add a file to a thread, at the bottom of the Submit reply screen, there is a box to attach a file. Just browse for the file and it should upload it for you :)

I hope this helps
All those keen on TA may want to consider whether all patterns are in fact lagging indicators - it happens all the time that a move is well underway and then the pattern appears
Maybe so, but the secret is to recognise in advance the possible formations and be ready to act one way or the other.Today was a classic example in case. Having done the analysis, the facts were there ready to act on. If 9100 failed, we went down, else we went up .OK so we dipped under by 12 points, but there was strong positive divergence to give confidence to the bottom at 9100 and so it was...It goes without saying that the short entry was NOT at 9099....just as much as the long entry was not 9101.
Well done Chartman, You nailed it yet again! How do you keep doing it? I hope you're going to let us into the secret on the 6th July :) I'm really looking forward to it.

Thanks for those kind words. I don't know how I do it, other than interpret what I see. Sometimes I get it right, sometimes I get it wrong.Sometimes I see what there is to see, sometimes I miss the obvious. At the end of the day a lot of it is pure luck, but as I said elsewhere, threre's no point in predicting tomorrows move, just be aware of the possibilities that exist and be ready to act on them by doing your homework.

Forecasting market direction is a 50/50 bet. Personally i am still fighting to not have an opinion, and just take my trades based on the opening market action, so on some days, i can end up predominantly against the trend, but quite often make more than if i was with it

The key is the actual level you take your trade in order to ensure that if you close a losing trade, you have a minimal loss

You seem to use the cash market for your analysis so i guess you are not trading off the charts you have on here?
There is no way to trade the cash unless you are trading a basket of stocks to represent the cash?

I understand from the spreadbetting companies that most of their clients lose money, and even those who do not lose in a short term period of time, do lose over time

I have studied the spread betting companies and their systems extensivly to see if there was anyway to arbitrage between their prices and future contracts etc, but my conclusion is that there isn't, since they hold the upper hand in the price they untlimately give you and more importantly, when they give you a price, and of course this can affect you going into a postion and getting out of the position - a double whammy

I dont think the amount of the spread is the biggest problem with spreadbetting companies, its mainly the inconsistency in the delay in getting a price from them which is the problem, and causes major slippage, again, both in opening and closing a position. This also makes it difficult to know the risk reward of any position.

There are a number of reasons why trading the Dow, as against the S&P. many appear "easier", but these are real technical reasons which i suspect only a professional trader understands, and the risk/reward ends up the same, you just need to use a slightly different technique to trade the Dow, as opposed to the S&P

I know whenever i have spoken to people who trade with spreadbetting or CFDs for that matter, that they always say that the make money, but i know from their lack of knowledge and also what the spreadbetting companies tell me, that there is just about no one making money with them, but i would appreciate your own comments and experiences, for your own trading and the others you speak with.
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True, you have to beat the SB companies at their own game by knowing the rules before entry. The spreads are 4-6 points on the dow which is an acceptable percentage. What you can't do is scalp in any way because of their bias. This is where they "advance" their spread by 10 or so points in an up move, based broadly on the action of the futures. If one wants to win with SB's, one must take a longer term view and have an appropriate strategy. I know of at least four people that trade the DOW that consistently do well and are in substantial profit. One has recoded capital increases on some days of 50% and more. My gains are less modest as I only trade part time. I suspect that those that lose, would lose whatever vehicle they used, be it SB's , CFD's or online brokers. There are a couple of exceptional traders on our BB that are getting to grips with "beating the bias", but they will be the first to admit that it extremely risky. Accordingly, and myself included, the bet size is minimal to reflect the risk and is done purely for experimentation and experience. NOT to be recommended at all.Period.

The SB companies dont "advance" their spreads, i have met a lot of spreadbettors who believe the spread changes or the spread "flips" - but it doesn't - there is a technical reason for this that i wont go into - but the pricing of the SBs is fair - its just that the cards are stacked against you - and its the fills which are the problem

There are very few big profesional traders who make money from long term positions and no one who is able to succeed with this strategy would use spreadbetting - since they would know the dangers of originating the opening position

The people you could easily make 50 or 100% profit in a day, certainly based on margin and even account size - but i can guarantee that overall they will be losing

A loser is a loser - u r right - but i firmly believe that losing is the only way to learn - but you have to be able to learn from your losing and be able to use what you have learned to make money

My own philosiphy is not based in taking wining positons - since that is a given - my skill is in taking the least losing positions and losing the least from those positions

I do appreciate your comments - but i do personally recommend trading to everyone - there is no better way to make money - if you are a "trader" - but there is of course only one way to find out - and that way is expensive wether you go onto success or not
I'd be interested to hear the technical reasons for "flips" and bias. In my previous quote, by longer term I meant hours, as opposed to minutes and scalping. for example take yesterday's DOW, entry at 9370@17:22 exit at the close. = 250 points. By my rules and TA, R/R huge- 10:1. Didn't quite make my 9100 target , but I'm not complaining. If I get hit for 20 points on the bias and spread, I'm happy. I agree 100% about cutting the wrong trade. Absolutely no point in thinking it might turn round. You were wrong and that's the end of it. That is where the spread and bias can do most damage.
more important than the entry - is the stop position - since its the accumulation of losses that kills the profits from the profitable trades

and if you choose your entry point from the cash market - you are going to get stopped out a lot - unless your stop is too wide - in which case - you will get stopped out less - but take some bad hits

its a 50/50 call wether your trade goes straight into profit or loss - but the problem will arise - when you have chosen the right direction - but the market has been purposely moved to stop you out before the market then heads in its planned direction - the direction you had chosen - but unfortunatly you have been stopped out of what would have been a winning postion and have therefore taken a loss even though you were right

as you are trading small size - you maybe comfortable with a wide stop - but the only way you make money is to trade large size and that is when a wide stop hurts and you do end up closing potenitally winning postions

thats why i tend to say that paper trading or virtual trading or low bet trading is a waste of time - since you need to suffer in order to reach the next stage in learning