A friend who is a hedge fund manager called me this morning and ask me to look at the pattern that has formed during the last 10 days in the chart of Dow Jones Industrial average. At first glance, he thought it looked like a strange lateral pattern:
Click on image to enlarge
This type of lateral patterns are common and often mark periods of indecision by investors. They also may mark the beginning of a new uptrend or downtrend. It is easier to spot these formation using a line chart that connects closing prices:
From the line chart of DJI we may see that two similar patterns occurred back in August and November of 2010, after corrections and both marked the beginning of a new uptrend.
Thus, there is nothing really strange about the current pattern in DJI. Investors and traders are currently holding back due to the geopolitical uncertainty in Africa and Middle East and the rise in oil prices it has caused. When there will be a resolution, in one way or another, the market will break out of this lateral formation.
Chart Source: Amibroker (Charts created with AmiBroker – advanced charting and technical analysis software. http://www.amibroker.com/”)
Disclaimer: The author is not a financial advisor and does not recommend the purchase of any security or advise on the suitability of any trade or investment in any timeframe. ETF, stock, futures, forex and options trading and investing involves substantial financial risks and can result in total loss of capital. If investment or other professional advice is required, a licensed professional should be consulted.
