Technical Considerations for 2010

What’s in store for us in 2010? Let’s see…

There are certain technical patterns that are more reliable than others: “flags” in particular are good indicators that a move, once started, will continue in the prior direction of the flag.

Head and Shoulder patterns are  also useful to determine when a prior trend ends and a new one begins.

As you can see below the inverted head and shoulders pattern from the March 2009 low would give us a measured target of 11,089 [to calculate the target take the low -6469- and the breakout point at the neckline -8779-, subtract (8779-6469=2310) and add to the breakout point to get the target (2310+8779=11,089)] on the DOW before this rally ends:

You’ll notice that the neckline slopes down and not up. Downward sloping necklines usually help performance so the target of 11,089 is probably a good one.

At 10, 500 though the DOW was showing extreme weakness internally. Each rally gets weaker in terms of the advance-decline line and up volume-down volume.

In addition we have reached the 50% retracement levels from the October 2007 highs in both the DOW and the S&P500.

Normally, if a correction of any kind is going to take hold it will do so at this 50% level.

What’s next?

According to Bulkowski (Encyclopedia of Chart Patterns, 2nd Ed., p. 366) , regarding inverse head & shoulder patterns: “Once price reaches the ultimate high, it tumbles about 30%, giving back nearly all of the gains on the journey up. Thus, selling as close to the top as possible is much better than a buy-and-hold strategy“.

A 30% decline from the target of 11,089 would give us our next target of 7,762. Wow.

Watch out below…