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Dow Mini Megaphone Top

The Dow made marginal all time highs in early December before turning back down. Many people are now jumping at shadows with every correction that takes place. This is understandable given the Dow's precarious position but it is my opinion that the ultimate top is still yet to be seen.

Let's examine the situation using the daily and weekly charts.


Dow Daily Chart

Dow Daily Chart
Larger Image

There has been a lot of talk about the massive megaphone top in the Dow on the long term chart. I showed this pattern in the recent December newsletter. This pattern has also set up on a much smaller scale on the daily chart which can be seen here.

Just as I am viewing the current price action on the long term chart to be a mega fake out of the megaphone pattern, I believe we are ahead of time in the pattern on the short term daily chart.

I have drawn a green highlighted circle which shows price breaking out above the top trend line of the megaphone pattern. I believe this was a fake out move and price has now dropped back into the megaphone pattern.

I have also drawn a trend line connecting the February 2014 and August 2014 lows. Price has come back to this support line now and turned up. This may well be the start of the next leg up to new all time highs.

I suspect the exact same pattern is playing out right now as that which I laid out in the long term Dow Logarithmic Yearly Chart in the December newsletter.

The Relative Strength Indicator (RSI) shows this low to be extremely oversold while the Moving Average Convergence Divergence (MACD) indicator looks like it may be turning back up after a steep run down.


Dow Weekly Chart

Dow Weekly Chart
Larger Image

We can see once again price making a false break of the upper trend line and price now finding support at the lower trend line.

I have also added Bollinger Bands which show the top candle had already moved away from the upper band with price now finding support around the middle band. A break to new lows now would likely signify price is headed to the lower band and a potential downtrend. And perhaps the expected final surge to new highs will get back up to the upper band for one last kiss goodbye.

I have added the RSI and MACD indicator to show the triple bearish divergences that have formed or are still forming. Now it is possible for the RSI to go back up and make a new high which is still below the second bearish divergence. The MACD has less room to trade and I suspect its triple bearish divergence is now in place.

This correction in December now means I am looking for a top in early January. So let's leave price to go through the motions and then we can investigate further any likely topping pattern as it takes place.

 

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