Originally published by Guppytraders.com
If anyone can win a trade war then somebody forget to tell the Dow. The opening shots of multiple trade and tariff wars have been fired at friend and enemy alike and the Dow does not like what it sees. The threat of these trade wars was enough to bring to a crashing bend the multi-year uptrend in the Dow in 2018 February. The Dow has never fully recovered, although it has not yet started a new downtrend.
The 2018 fall in the Dow set the downside edge of a trading band. This is near 23,300. In a strong bull market this fall would be followed by a strong rebound and a continuation of the long term uptrend. This did not develop.
Instead the Dow developed a weak rebound that encountered strong resistance near 25,400. This has formed the top of a new trading band. The strength of the trading band was confirmed in June with the Dow retreat from 25,400.
The Dow has a strong and consistent uptrend that started in 2016 November and ended in 2018 January. Since January the Dow has moved in a unremarkable and lethargic sideways trading band. There have been string rallies from the bottom of the band to the top of the band. They have been followed by equally string retreats and retests of the trade band. In an important sense this activity shows indecision. The market does not welcome Trump's trade wars, but nor is it firmly opposed to them.
If the trade wars were welcomed then the Dow would resume its uptrend with a strong and steady breakout above the upper edge of the trading band. This breakout would have an initial target near 27,500. The target is calculated by taking the width of the trading band and projecting it upwards.
If trade wars were unwelcome, then the reverse applies. The Dow would move decisively and quickly below 23,300. The downside target for this retreat is 21,200 and is calculated using the width of the trading band.
These chart pattern targets are important, as are the upper and lower levels of the trade band. They are significant because a breakout above or below the trading band often signals a very rapid move towards the target levels. Traders who go long in anticipation of a rebound from 23,300 would need to rapidly cover their long positions if the market moved below 23,300.
The potential for a rapid breakout above or below the trading band levels means that investors need to exercise caution as the Dow approaches these levels. Its better to wait for confirmation of a continuation of the trading band pattern or of the breakout, before taking a position.
Traders continue to trade the retreat towards support near 23,300. We use the ANTSSYS trading method for this.
Daryl Guppy is a leading international financial technical analysis expert and special consultant to Axicorp. Guppy appears regularly on CNBC Asia and is known as "The Chart Man". Disclaimer: Daryl Guppy is not a financial advisor. These notes are for educational purposes only and provide an example of applied technical analysis.