Dow Theory 101

Well, the Dow seems to be moving above the 11,750 area that I referenced a couple of weeks ago. It’s been a struggle, but the Dow has slowly inched higher. However, I do think there are some major red flags starting to pop up.

First, it is very concerning that while the Dow has been moving higher, the secondary indices have been struggling. For example, after reading this article, take a minute and review the charts of the Russell 2000 and the Nasdaq. Even though the Dow held it’s ground, and actually grinded higher last week, those two indices have moved lower. In a healthy market, we’d like to see everyone moving higher together. With the “risk-on” stocks like those contained in the Russell and Nasdaq selling off, it wouldn’t appear that the markets are NOT healthy. Rather, they seem to be falling apart a bit.

More importantly, let’s stick with the Dow. More specifically, Dow Theory. Investopedia probably sums it up best: “A theory which says the market is in an upward trend if one of its averages (industrial or transportation) advances above a previous important high, it is accompanied or followed by a similar advance in the other. The theory also says that when both averages dip below previous important lows, it’s regarded as an indicator of a downward trend.” Those that follow Dow Theory will look to the Dow Jones Industrials (DJI) and Dow Jones Transports (DJT) to gauge the “health” of the trend in force, based on the criteria set out above.

So, take a look at the following charts of the DJI and DJT (closing prices):

As you can see in the first chart, the DJI has in fact continued higher. Unfortunately, the transports have turned lower. This appears to be one of the first steps in the unfolding of a move lower, to one extent or another. Of course, if the DJT reverses and confirms the DJI’s high, then all will be well again, for now.

The Tale of the Tape: Although the DJI has continued higher, and may be on it’s way to 12K, the DJT has failed to take part. In addition, other secondary indices such as the Russell 2000 and Nasdaq have also “peeled away”. While the DJI seems dead set on marching higher, the overall market does not seem to agree. Keep an eye on the DJT and the other secondary indices.  The DJI cannot go it alone. Be prepared to adjust your trading and/or investing strategy if the markets finally turn lower. OR, look to see if the DJT, Russell and Nasdaq eventually confirm the recent DJI’s move.

No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade.  Capital preservation is always key!

Good luck!

Christian Tharp, CMT

Silver update II?

I just wanted to do another quick follow-up on silver. I have been following the movement of silver, and gold, for the past few months in expectation of a downside reversal. The metals have continued higher, but has the party finally ended?

Please review the following chart of silver with my added notations:

Over the past several months, silver has been bouncing along the up-trending support line I have drawn. Silver has approached this up-trending support line again, so might that be a point of entry for a long position? What if that trend line were to break?

I have an opinion: I think silver is going to break lower. Why? Please review the silver ETF SLV that I have shown below:

First, the SLV has already broken its support level. Next, you will notice that both volume and momentum (MACD) have been negatively diverging from the rising price of the SLV. So, it looks to me like silver is preparing for a move lower, but you be the judge.

The Tale of the Tape: Silver has pulled back to its support line again. If you are bullish on silver, you could enter a long position on silver or the SLV. However, the SLV seems to be flashing signals of trouble on the horizon. So, if you are bearish on silver, you could enter a short position on silver, the SLV or go long the ZSL for a short-term trade. Similar trades on gold could also be made.

Waiting for the most opportune times that I have outlined above could provide you with higher probability entry points. No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade.

Good luck!

Christian Tharp, CMT

11,750 isn’t important, is it?

Identifying important levels on the markets can be quite a tricky task. First of all, which index do you look at? Next, what time frame is analyzed? Etc. Since technical analysis is somewhat objective, I really don’t think there is necessarily a right or wrong answer to these questions. However, from time to time some key levels are quite clear, at least to me.

A lot of people have a tendency to hone in on round numbers such as 11,000 or 1200. For example, I’ve heard 12,000 on the Dow being referenced quite often lately. I would certainly agree that these price points are usually important, but there are definitely other prices that can be important. Please review the chart of the Dow below:

You will notice the level I’ve highlighted around 11,750. The all time high at the forefront of the Dot.com bust was 11,750. This same level was resisted the next time up in 2006. That same 11,750 became support briefly on the way down in 2008. So, is it really a coincidence that that Dow stalled just over 11,700 yesterday? Add this to the Nasdaq hitting 2700 and Russell stalling at 800 and you have yourself an interesting potential stopping point for the markets.

The Tale of the Tape: 12,000 on the Dow may not be a foregone conclusion. 11,750 has proven itself to be important throughout the last decade. Combine this level (which is close to where the Dow stalled yesterday) with a market that is definitely “due” for a pullback and the stage could be set for some trouble. Use your stops and protect yourself from a potential reversal. Be on the lookout for short trade setups if they present themselves.

No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade.  Capital preservation is always key!

Good luck!

Christian Tharp, CMT

Todays Big Stock: News Corporation (NASDAQ:NWSA)

From time to time I like to give readers a heads up on potential trading opportunities. Before considering any trades that I might outline in Chart School, always remember that you must decide for yourself if you like the trade.

One key factor in making that decision will be to decide which side of the trade you believe gives you the highest probability of success. In other words, do you like the short side of the market, or do you like the long side? You don’t necessarily have “know” what side to be on, but it certainly helps to take a stance. So, if you haven’t thought about it, review the overall indices themselves. Take a look at the S&P 500 for example. Is it trending higher or lower? Has it recently broken through a key resistance or support level? Making these decisions ahead of time will help you decide which side of the trade you believe gives you the best opportunities.

NWSA has formed a common price pattern knows as an Ascending Triangle. This pattern is commonly thought of as a bullish pattern (at least when formed during an up trend), meaning that NWSA could be positioning itself for a break higher. However, the stock could just as easily break lower rather than higher. That is why waiting for the breakout, one way or the other, is the preferred, higher-probability trade.

The Tale of the Tape:

NWSA (News Corporation) has formed an Ascending Triangle pattern. A breakout above $18 should signal the stock is moving higher, thus entering a long position would be recommended. However, a break down below the up-trending support line would be an ideal entry for a short position.

No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade. Capital preservation is always key!

Good luck!

Christian Tharp, CMT

Trade watch – MOS

From time to time, I would like to give readers a heads up on potential trading opportunities. Before considering any trades that I might outline in Chart School, always remember that you must decide for yourself if you like the trade.

A key factor in making that decision will be deciding which side of the trade you believe gives you the highest probability trade. In other words, are you bullish or bearish on the market? If you haven’t thought about that, review the market indices themselves. Take a look at the S&P 500 for example.  Is it trending higher or lower? Has it recently broken through a key resistance or support level? Making these decisions ahead of time will help you decide which side of the trade you believe gives you the best opportunities.

The trading opportunity that I’d like to review today is that of MOS (Mosaic).  Before discussing, please review the 1 yr. chart of MOS that I have outlined below:

If you have read my previous Chart School newsletters, you may already know that I believe the simplest tends to be the best. In my experience with other traders and students I have coached to trade, the ones that keep it the simplest always seem to do better than the ones who may overcomplicate things a bit.

This simplicity is on full display when you look at the chart of MOS above. From March until now, $65 has been a key level of both resistance and support for MOS. Over the last 3 months, $70 has also been key as support, then resistance. These levels can provide some excellent trading opportunities.  First, a buy at $65 support looks great. It also appears that a short at $70 is possible, especially if it continues to shoot above $70 only to sell-off back below it. But, what if MOS breaks below $65? Or, what if MOS can hold above $70?

The Tale of the Tape: MOS has two very important levels at $65 and $70. Long positions could be entered on a pullback to $65 or a break and hold of $70. Short positions could be entered at $70 or on a break below $65. Regardless of the trade, stops above the levels on shorts, and stops below the level on longs would be advised.

No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade.  Capital preservation is always key!

Good luck!

Christian Tharp, CMT