Watching the Dow for an Entry Point

 | Nov 09, 2012 | 7:00 AM EST
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Today, I'd like to talking about knowing when to place a bet on the Dow Jones Industrial Index (INDU) and the Dow Jones Industrial Average ETF (DIA).

Before you start thinking "this lady is crazy," I am not suggesting that anyone step in front of a moving freight train ... especially a fast one. The trend in the INDU is currently down on the daily chart and remains in a downtrend unless the Nov. 6 high is taken out on the upside.  

I am, however, giving you some key time and price support decisions that should be watched on the way down in this market. These support decisions may not terminate the current decline in the stock indices, but if we do start to see the reversal indications, you will be prepared with a sharp stick to pick up some cash on the floor. If these cycles kick in for a low, we are likely to see a tradable corrective rally unfold.  

In Columnist Conversation on Wednesday, I posted a chart of the cash $INDU index. Some timing projections currently suggest a window for a possible low, right here right now. It is simply a 100% projection of two of the prior declines visible on the daily chart below that were 22 and 23 trading days. As of Thursday, the decline from the Oct. 5 high is now 22 trading days down, which is very similar to these two prior declines in time. We are also a bit oversold and extended to the downside. These parameters warn of a corrective rally unfolding within the next few trading days.  

As far as price is concerned, we are also close to testing some key support decisions. These come in at 12,741-12,790, 12,553-12,656 and 12,349-12,417.  With that being said, I would need to see some clear reversal indications before placing a bet on the buy side. To give you an idea of what I mean by this, let's go look at a prior setup that was similar. This is when the June 4 low was made when there was "time symmetry" (22 days vs. 23 days) in the past. Let's look at what I would have needed to see in order to feel comfortable placing a bet on the buy side against those parameters.

Dynamic Trader

If you take a look at the 30-minute chart below of the Dow Diamonds, this is a snapshot of when the June 4 low was made. Note that the bearish pattern into this low shifted to a bullish one when we both took out a prior swing high and saw a moving-average crossover to the upside.

DIA 30-Minute
Dynamic Trader

I like to use the 8 ema above the 34 ema. This was followed by a huge rally. My risk could have been defined right below the June 4 low. If you look at the next chart, which is the current 30-minute chart of the DIA, we are currently nowhere near triggering a buy entry, though I will be watching for one in the next few trading sessions.  

Dynamic Trader

If there are no reversal indications, I won't be placing any bullish bets against the current time and price parameters. You may be right ... I may be crazy ... but there is a method to my madness!


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