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Trend-channel Analysis Suggest Stocks Are About to Fall

Prices have risen decisively above key resistance at the top of a Declining Trend-channel from the April 26th, 2010 top in the Industrials. This is a very important trend-channel, as both the top and bottom boundary lines are defined by at least three touch points, and the decisive breakout could mean a significant rally leg has started.

However, there is key resistance from another trend-channel, this one rising from July 1st, shown in red boundary lines. Prices could be setting an upside target of the upper boundary of this channel, 11,100ish in the Industrials. If prices rise next week, this scenario is the most likely one.

However, there is another possibility this weekend, that prices have topped precisely at key resistance at the blue rising trend-line drawn from the tops in June and August. This line has four touch points and Friday's rally took prices precisely to this line and stopped - a fifth touch point. This argues that prices have topped and the start of a decline to at least 10,200ish is imminent.

Should prices fall decisively below the lower rising boundary line from the July 1st, 2010 low, below 10,200ish, that would be very Bearish, and suggest stocks are crashing.

I have drawn out a possible scenario where prices are forming a large Rising Bearish Wedge from July 1st, with the blue line as the upper boundary of this pattern. If this is the case, next we should see a drop to 10,250ish, followed by one more rally to 11,000ish, then a stock market crash, starting in early 2011.

Dow Jones Industrial Average from January 1, 2010

Prices have risen precisely to key resistance at the top of a Declining Trend-channel from the October 2007 top in the Industrials, and stopped. This is in addition to prices rising precisely to the blue trend-line from June 2010 and stopping there Friday. Same place, the intersection of two key upper boundary trend-channels. With prices stopping at two key trend-lines, the odds of an imminent decline are fairly high.

Should prices fail to rise above the upper boundary of the declining trend-channel from October 2007, it would mean the next decline could target the bottom boundary, which would take the Industrials down toward 5,000ish. On the other hand, a decisive rise above the upper boundary line could be quite Bullish.

Dow Jones Industrial Average from January 1, 2007

 


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