Late last night when I was working on the Dow chart I had one of those epiphany or moments of clarity when all of a sudden everything made sense. They don’t happen very often but when they do they tend to be right. I had this same thing happen to me when I was working on the long term chart for the US dollar several years ago.

Here is what I came up in regards to the INDU. Sine the low in October of last year the INDU had a very big rally but then traded sideways for most of this year. Normally one would be looking for a consolidation pattern to form if the bull market was intact. As the sideways trading range developed no clear cut pattern ever emerged as a consolidation pattern. Even a topping pattern didn’t show itself such as a H&S top or double top which usually accompanies a top. Last night looking at the price action over the last two years it hit me like a ton of bricks.

The trading action that has been building since the low last year was in fact a rounding top. And a very nice rounding top at that. That was indeed a reversal pattern to the downside. If you recall we were short going into the initial crash and exited our short position after the second day I believe because the VIX had spiked up to the way overbought buy area.

Lets focus in on the support and resistance line that defines the rounding top. Note the last drop to the S&R line and one last little spike up to 17,600 or so just before the INDU crashed into the August low. That last little pop and drop confirmed the support and resistance line was in the right location.

The rounded top met its price objective down at the 15,900 area which was in the same vicinity as last years Octobers low. So now the rounded top’s price objective has been reached we can look for either a reversal pattern or consolidation pattern to form.

I’ve added a red circle to show you how the INDU is reversing backup after creating an ugly double bottom. Note how the support and resistance line is interacting with the current price action. After breaking above the double bottom hump the Dow rallied up to the S&R line and backed off to find support at the double bottom hump which one would expect, resistance turning into support. From there the Dow then rallied again this time breaking above the S&R line at 17,100. This was a major test. Yesterday the Dow back tested the S&R line and it held support. Again resistance turning into support. Today we’re getting some follow through to the upside help confirming the big support and resistance line is correctly placed. It’s still very possible the S&R line will get back tested again but that would represent a very good buying opportunity IMHO. I will also feel better about this rally if the Dow can trade back above the rounded top trend line which now comes in around the 17,315. The back test area would now come in around the 17,100.

It’s all making sense right now. We had the big correction that bottomed in October like so many do. I have to say it has been lonely being a bull over the last several weeks or so as just about everyone is looking for a crash. I now have my line in the sand. Above 17,100 is bullish and below is bearish. As you know there are no absolutes when it comes to the markets so until 17,100 is broken to the downside I have to remain a bull. The moment of truth has arrived for both the bulls and bears alike.

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