Here is an interesting pattern - fingers crossed !!!
The Diamond Bottom Reversal
The diamond bottom is a technical pattern that often precedes strong reversals, and it seems that one could be emerging in the Dow Jones Industrial Average. This pattern is characterised by a diamond shape. Interpretation of these price patterns is often in the eye of the beholder. One man’s diamond is another man’s rectangle, which is why it’s important to understand the psychology that underlies this particular chart pattern.
Diamond bottom reversals are particularly hard to identify, but are usually characterised by their emergence towards the end of a downward trend and their price volatility. In a typical diamond formation, a big sell-off is followed by a rally. Investors think the worst has passed, but hopes are dashed as price breaks down again to new lows. From this point volatility recedes, and price slowly creeps upward, typically on softer volumes. This 'quiet' recovery following a period of high volatility, then paves the way for a meaningful rally.
These characteristics have been evident in recent months. The Dow’s October 10 ‘panic low’ culminated a horror week in which it crashed 18%. But after successfully retesting this low and rallying to recover that week’s losses, a growing chorus of investors felt that the worst had passed (at least for the short term). However, typical of the diamond formation, all hope was dashed as price broke to fresh lows in late November. Since this time price has recovered somewhat, also rallying over 15% from its low point. Significantly, 10 day price volatility has retraced after reaching a 38 year high, and volumes have receded.
However for the reversal to be confirmed, price needs to break upward out of the diamond border, typically on higher volumes. This did occur on Monday evening, but we have yet to see any solid follow through. For a bullish confirmation we are on the look out for a close above 9,000. However should the Dow break below 8118, the diamond may be at risk of failing.
Assuming that we have a diamond on our hands, the pattern yields an upside target of 10,800 to 11,000. This level coincides with overhead resistance generated by the Dow’s consolidation in the 3 months to October before it collapsed. Will it get there? Nothing is certain. Therefore, rather than relying blindly on such forecasts, we will keep this scenario in mind, watch price closely, and react accordingly. Because even if price does manage to rally from here, it does not necessarily mean that we have shaken the bear from our backs.
Dollar Bearish?
While there is a case for the share market bulls to start dragging their heels through the dirt, the same cant be said for the US Dollar. The greenback has been one of the few assets to strengthen over recent months as investors around the world scrambled to pay down debt, the majority of which denominated in US Dollars. But in order to do that, one needs to have US Dollars on hand, hence the phenomenon has increased demand for the currency. We last wrote about the greenback in our November 2nd edition of the wise word, citing that it was looking overbought and showing bearish divergence. In recent weeks this view has been confirmed in price, with the US Dollar Index forming a bearish head and shoulders pattern. Is it a case of investors ditching their Dollars for Diamonds?...
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