The Dow Industrials Index bounced hard off its January 22 low. The price bar of the Industrials’ Daily chart for that day shows a picture-perfect very large “Hammer” at the end of a long decline, which foretold a reversal of trend and a rise in prices. It was confirmed the next day by a tall white bar sporting a very long lower shadow, or tail. Three bars together, as a group – the Hammer, the black bar which preceded it, and the tall white bar which followed it – were a variation on a “Morning Star,” which is a bullish pattern. Prices rose nicely thereafter to February 1, for a total of about 1128 points in the move before topping and reversing.

Since that time, prices have been ricocheting in a developing pattern which appears to be a narrowing concentric triangle. If the pattern is in fact a triangle, we expect to see five waves (A-B-C-D-E) within it, bouncing off the top and bottom trendlines of the triangle. I label the 1128-point upmove from January 22 to February 1 as wave “A.” Waves “B” and “C” are in place, and Wave “D” may have been completed on February 15, even though prices did not fall so far as to touch the lower trendline. (It is common to find that “D” waves in a triangle do not reach the lower trendline).

IF this is a triangle and if I am not just imagining things, then Wave “E” is next, and it could mean a substantial rise in prices before topping. How far might it go?

The literature tells us that the final leg of a triangle can often be expected to travel the same distance as the height of the triangle, measured from the point of breakout. If we count the height of this triangle (if it is one) as the point distance which was covered by Wave “A” (1128 points) then, if an upside breakout through the upper trendline of the triangle were to occur within the next few days as Wave “E,” say at 12,450, then Wave “E” would travel 1128 points upward from 12,450, and end at about 13,578.

It’s interesting to note that Wave “B” bears a Fibonacci relationship to Wave “A” (.6188!). Wave “C” appears not to have a Fibonacci relationship with either Wave “A” or Wave “B,” but when it ended it had retraced about 72% of Wave “A” and stopped there, which is a little more than midway between common Fibonacci retracement targets of .618 and .786.

Triangle in the Dow Industrials?

If this is legitimately a triangle, something will have to happen soon, because the price bars are rapidly approaching the “apex.” If prices simply continue laterally within a very tight range, obviously they will run past the “apex,” which means there never was a triangle at all. If prices break below the lower trendline, then bullish implications would be negated, and the concept of a triangle would at least seriously be placed in doubt. However, if prices break out above the upper trendline, then the idea would gain in credibility and we might see prices heading up toward 13,578.

The Japanese Candlesticks patterns of price action in several time frames during the final hours of trading last Friday, February 15, were moderately bullish. The bar on the Daily chart was a modest Hammer, as you can see; but it did not occur at the bottom end of a long decline, as happened in January. I would not be surprised to see prices at least test what appears to be the upper trendline. If they break out meaningfully above it, then the idea of a triangle would tend to become validated. In any event, the next few trading days will tell a story, one way or another; and it will be quite fascinating to watch.

William G. Kurtz Jr. Feb. 17, 2008 http://www.candlewave.com/candlewave.htm