Is the Dow Jones Forming a Top
While No One is Paying Attention?

While looking over some charts recently, I couldn't help but wonder if the Dow Jones is forming a top silently while the media headlines were directed towards the markets "making new highs".

before we get any further, as many readers of Online Stock Trading Guide know, I am more on the defensive at times and on alert for signs of a top or impending reversal.

I think it's because I've always known that we can plan ahead with a goal or objective and then come up with steps to reach our end target. Having a goal of minimizing risk and potential loss (not just in finances) helps, or causes one to develop an awareness of these risks and take steps to avoid them.

I'll have to write about my thoughts on this more in another article but know that I am not a person who is always negative on things either, I do look at the bright side of things in life also, just with investing I know that money can be made on both sides of a trade and many times I like to go against mainstream.

Back to the potential top in the stock market... I recently added an article related to this back at the beginning of December, 2010 here: Dow Jones forming a potential Head and Shoulders Pattern on December 6, 2010 to be exact, when the DJIA was at 11,362.

In the December 6, 2010 article I mentioned 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. Today the DJIA is at 11,604 after rallying since early December to new multi-month highs.

The first chart below shows how the DOW is currently at a major resistance area in effect since August, 2008, right before plunging into the March, 2009 lows.

Note: You can click on some of the images below to view a larger, clearer image.

Dow Jones forming a top

If the above chart doesn't get your attention enough, take a look at the next chart. Notice how the same major resistance level in the first chart above was the peak of the potential left shoulder in a head and shoulders pattern, back during the year end rally December, 1999-January, 2000. Not just that, but notice that this is the 5th time prices have reached the current level just below 12,000, and that out of the last 4 times, 3 have been tops with reversals that followed. The only time prices moved higher was during the credit bubble in the market leading to the October, 2007 peak. We all know what happened then.

Dow Jones chart 1998-2011

Now let's take note of the divergences that have been occurring on the charts. In July, 2010 a clear divergence occurred as noted and signaled a bottom at point "A" on the chart below. Point "B" shows the next "slight" divergence, which also signaled another tradeable shorting opportunity.

The next clear divergence, point "C", is where we are at know. These patterns are not always, 100% accurate, but, looking at the chart below, everything seems to be aligned just right for the Dow Jones forming a top to be in place.

Dow Jones Divergence

Finally, my last chart for today provides further fuel to the Dow Jones forming a top theory, a what appears to be a completed Elliott Wave pattern. If my labeling is correct, we are currently at the end of a major wave "2" (circle 2). If so, now is going to be the best chance to go short the market for a long time to come. For more on Elliott Wave patterns to see what I'm talking about and see what comes AFTER the end of wave 2, check out a free Elliott Wave video crash course

Dow Jones Elliott Wave Pattern

Please keep in mind that the idea's and points I written about above are opinions and opinion-based analysis only, not any recommendations. Please use your own judgement before making any investment decisions. Also, I based the information above on the DJIA but only for the context of this article. Other indices and markets may be in similar scenarios, just not reviewed here.




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