Dow Jones Forming a Head and Shoulders Pattern - December 2010

Has anyone else noticed the Dow Jones forming a Head and Shoulders pattern lately, or is it just me? I've included a couple of charts below to show what I've noticed lately.

Maybe the majority of people are consumed with all the other wild news stories that are out there on a day to day basis. Between trillion dollar government programs, tax hikes, tax cuts, tax extensions, no double dip recession, double dip recession, etc. who can keep up anyway?

In the charts below I've added annotations to show the potential for the Dow Jones forming a Head and Shoulders pattern.

You'll also notice I've added potential key upper resistance levels as well as a potential Elliott Wave pattern unfolding. Elliott Wave patterns are interesting and often discarded, many times because they help forecast what may come in the future, which is represented by a change in trend at some point or another. Nobody likes to go against the crowd, so a potential forecasted trend change is looked upon similar to a streaker during a halftime football show - a couple of seconds of attention and that's it. (maybe not exactly like that)

The first chart below begins back in January, 1951 and goes up to October, 2010. (I couldn't get the chart to display up through December, 2010 but the pattern I explain below still exists and is still unfolding, only potentially nearer to an end).

Dow Jones forming a head and shoulders pattern

On the first chart above you can see I've pointed out the potential for the Dow Jones forming a Head and Shoulders pattern as it's been unfolding. The left shoulder peaked back in January, 2000, the head peaked in October, 2007 and the right shoulder appears to be nearing its peak now. While never 100% accurate, Head and Shoulder patterns are at the least, worthy of attention.

The second chart below zooms in a little closer, from January, 1997 up through December 6, 2010. You can see I've added the red dashed resistance line which was both the peak of the left shoulder in January, 2000 and the current price level today, potentially at or near the peak of a right shoulder.

Dow Jones upper resistance

You'll also notice on the chart above that I've added potential Elliott Wave labeling. Starting at the peak of October, 2007 down to the March, 2009 lows is a clear 5 wave move down. In Elliott Wave analysis, an A-B-C counter-trend move follows a 5 wave directional Impulse wave. I've added the A and B, the only thing left to occur is the C, which would be higher then B, which it currently is.

The third chart below zooms in even further and displays from July, 2007 through December, 2010. You can see that I've left the same primary wave "circle" 1 down labeling intact as well as the "circle" A and "circle" B, but since we are zoomed in I've sub-divided the "circle" A wave and potential "circle" C wave further.

Dow Jones Elliott Wave Pattern

You'll notice on the chart above that the "circle" A wave clearly is displaying a 5 wave move which is in the direction of the counter-trend and would confirm this labeling. From "circle" B up to the potential future "circle" C should unfold into a 5 wave pattern also, which if my labeling is correct, could be any day now.

I've also added an upper price range that if prices were to reach, could still confirm this pattern unfolding and the potential for a major top formation, also the right shoulder peak.

The final chart below takes out some of the noise I've added to the third chart above, only displaying the primary trend 1 bottom, counter-trend points "circle" A and B and the price level at the peak of the potential left shoulder back in January, 2000 displayed by the red dashed line below the text. You can see that we are fast approaching this price level.

Dow Jones right shoulder

A final note for the last chart above: in many instances you'll find either the beginning secondary wave of a trend or the end secondary wave of a trend as extended, one or the other but typically not both. Using the chart above as an example, counter-trend A-B-C consists of 3 secondary waves individually, A, B and C. Wave "circle" A above is definitely extended as you can see how long it took to unfold. Since A is extended, C typically would not be. All of the momentum was used up during wave A and should fade during a final move in a trend.

In contrast, if the first secondary wave ("circle" A) were to have been brief, then the momentum would have not been used up and instead built up and ready to explode, thus causing the final secondary wave ("circle" C in this case) to be extended.

That's it for today's analysis. Trade smart and manage any open positions with caution. The end of the year is always a tough time to figure out what's next. An end of year rally wouldn't be out of the question into January, 2011, which would be the same scenario that set up the January, 2000 peak.

To learn more about Elliott Wave patterns or to brush up on what you may have already learned, be sure to take advantage of Elliott Wave International's Basic Tutorial including 10 Free Lessons on the Elliott Wave Principle across 50 pages of material.

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