Talking Points
- Dow Jones is higher 7 days in a row and higher 12 of the last 19 trading days
- The risk to reward ratio is now shifted towards short positions in a triangle pattern
- Traders can identify risk near 18,000 and a target near 16,500
Dow Jones Industrial Average (DJIA) has finished higher 7 days in a row and higher 12 of the last 19 trading days higher. This spurt higher of 14% is similar in size to the Q3 2015 up trend. This strong move higher has created a technically overbought condition that is ripe for a correction based on a triangle pattern.
Dow Jones (ticker: US30) 4th Leg of Triangle Appears Terminal Below 17,977
Created using FXCM’s Marketscope charts
As we can see in the US30 chart above, a CFD which tracks the DJIA, a trend line (blue) connecting the spring 2015 high to the fall 2015 high comes into play near yesterday’s high of 17,650.
If we pan out on the US30, it appears to be taking on the structure of a triangle (see the ideal image below). The triangle pattern would suggest we are in the final stages of the 4th leg of the 5 legged triangle. According to the triangle pattern, US30 would need to hold below 17,977 for a sell off towards 16,500. Around 16,500 is where the triangle would terminate and lead to another actionary move higher.
A trader interested in taking advantage of the pattern can initiate a short position near current levels with a stop loss near 18,000. A conservative target level is 16,500 with a secondary target near 15,750.
For those interested in trading, we’ve studied the behavior of traders and found this one little tweak on risk to reward ratios increased the pool of traders who were profitable from 17% to 53%. Learn more about that tweak in pages 7-9 of the Traits of Successful Traders Guide. Keep that tweak in mind as you assess the US30 (residents outside of the United States can trade this CFD through FXCM.)
Related Reading:
S&P 500 – Is It Déjà vu All Over Again?
S&P 500/Dow – Tech Update Ahead of Holiday
---Written by Jeremy Wagner, Head Trading Instructor, DailyFX EDU
Follow me on Twitter at @JWagnerFXTrader .
See Jeremy’s recent articles at his Bio Page.
