This week we saw the Dow’s price teeter totter up and down as we head towards May. When there was no news, the Dow sat and idled, without direction, extremely lackluster. When news struck, the Dow moved briskly, only to quickly forget that news and return to an idle state. Unlike the steep uphill rally in March, April has been a month of lackluster whipsaws. Does this forebode the “Ides of May”, when the old adage comes into play, “Sell in May and Go Away.”
For the moment, lets stop and look back at the last two months activity. On March 17th, the Dow rallied to a high of 13,288. From there it promptly sold off, only to return to another high on April 3rd, or 13,297. This was almost a perfect Double Top candlestick formation. Think that’s a coincidence? On March 7th, the Dow sold off to a low of 12,735. On April 11th, the Dow again sold off to a low of 12,710, almost a perfect Double Bottom. Come on, you can’t still believe in coincidences now can you?
What is a “Double Top” and “Double Bottom” and what does it mean for the future direction of the Dow? For those of you unfamiliar with reading candlestick patterns, they are not nearly as coincidental or “farfetched” as reading tea leaves.
Double Top formation: the Dow price peaks after a major rally, such as what we saw in early March where the Dow went from 12,735 to a high of 13,288 in just 8 days. Next there is a small decline, from 13,288 down to 13,002 on March 24th. Finally, another rally that forms a second peak about the same of the first peak, April 4th at 12,297. Looking at the chart, an almost perfect letter “M” is drawn on the Dow chart. A Double Top means strong resistance to trending higher, as if traders are saying, “I’m not comfortable right now paying any more for these stocks.”
Double Bottom formation: the Dow price plunges after a major sell off, such as what we saw in early March 7th where the Dow dropped to 12,735 from 13,055 in just 3 days. Next there is a rise to 13,297 on April 4th. Finally, another plunge to about the same as the March 7th to 12,710. A Double Bottom means there is strong support stopping the Dow from going lower, as if traders are saying, “It’s a fire sale, let’s buy stocks.”
Since both a Double Top and Double Bottom were reached, how can we tell which direction the Dow will go now?
Another formation has recently taken shape, starting from the plunge on April 11th. The Dow went from 12,710 to a high of 13,131 on April 18th. The Dow could go no further and has begun a retreat, closing on Friday at 13,029. This formation shows what is known as a “Lower High” on price. This is the first Lower High. A truly Bearish trend would be a series of successive lower high prices and then even lower lows. As this is just the first lower high, it is not possible to say, yes, a Bearish trend has started. But definitely this is something to watch out for. If next week results in another Lower High and then another Lower Low, the Ides in May could be just around the corner.
Barbara Cohen CIO, Shadowtraders, and professional day trader, specializes in teaching students how they can be trading futures with their own trading system and trading strategies. Ms. Cohen has helped hundreds of traders achieve their goals trading. Find out if trading futures is for you by attending one of Ms. Cohen’s Free Webinars. Check out my Futures Trading Articles. For more information, send an email to email@example.com or call 866-617-2037 today.