DOW BREAKOUT PATTERNS

By Daryl Guppy
INDICATOR REVISION
TRADING BANDS
The walls of a trading band
are defined by a set move above
and below the median price. These
walls are parallel to the median
price which is usually calculated on
a 10 day simple moving average.
Trading bands provide trading
opportunities based on the
consistent price movement
between the walls of the band.
Trading bands provide an idea of
under and over valued prices.
historical behaviour.
A few months ago there was a significant concern
that the DOW index was developing a head and shoulder
chart reversal pattern. The danger was in the similarity
between this pattern of development and the patterns
seen in the US market following the 1930 market collapse.
This modern head and shoulder pattern was invalidated
when the DOW closed above 11700. The rebound rally
above this level has continued for nearly 5 weeks.
The pattern of support and resistance, and the
broad pattern of trading band behaviour provides some
calculation points for projecting future targets for the
DOW. The outlook is more bullish than it has been in
recent months. The potential for a sharp temporary retreat
during October remains a strong probability based on

The consolidation pattern starts with support near 9700. There was strong historical
support in this area in 2003 and 2004. It provided support for the low points of the DOW retreat
in 2010, July. In 2010 the index also found support slightly higher near 9800. For calculation
purposes we use 9700 in the middle of this small 2010 support band. Charting analysis does
not always provide convenient exact figures.
The upper level of this broad trading band is near 11,200. It is used with caution
because this resistance level has not been completely tested. Its based on the DOW highs in
2010 May. The recent market reaction away from this level helps to confirm its importance as a
psychological resistance level.
The strongest and most consistent support/resistance level is near 10,600. This is the
most important feature on the DOW chart. The move above 10,000 captured public imagination,
but it is 10,600 that has most consistently acted as a support or resistance level. This was the
resistance point that developed the potential right shoulder in the head and shoulder pattern. It’s
the move above 10600 in the last four weeks that confirms developing trend strength.
This pattern of support and resistance provides a method to calculate a short term target
for the DOW and a longer term target. These are targets achievable with a breakout above
11,200.
 The short term target is near 11700. It is calculated by measuring the distance between
the 10600 support resistance level and the upper edge of the trading band.

The long term target is near 12700. This is calculated by measuring the full width of the
trading band between 9700 and 11200. This value is this projected upwards.

Breakouts from this types of consolidation patterns have developed in several markets.
The breakout from the consolidation pattern in the Shanghai Index rapidly achieved the first
target of 2780. It continued to quickly move towards the longer term target near 2880. The
behaviour of the India market shows the same type of consolidation breakout pattern that is
seen with the DOW. The India breakout has moved more quickly, achieving the first and second
calculated targets.

Breakouts from consolidation patterns are often very powerful, although they take many
weeks or months to develop. This confirms the potential for the first and second DOW targets to
be achieved.

The second factor is to assess the projected targets against historical behavior. The
first target near 11750 also acted as a resistance level in 2008 August and earlier in 2006. The
upper target level near 12700 acted as resistance and support level in 2008 March and also
early in 2007.

When chart pattern calculation areas generate targets that matched with historical
support and resistance behavior then it helps to verify the calculations. It increases the
probability these targets will be achieved and that they will act as pause points in the trend
development.

The immediate task for the DOW is a breakout above 11200. Failure to break above this
level suggests a retest of support at the strong 10600 level. Continued oscillation between
10600 and 11200 is bullish behavior and points the way to a successful breakout above 11200.