Special Alert: The Dow Is in Trouble

April 21st, 2013
in contributors, syndication

Written by

It seems to me that it's almost a certainty now that the Dow peaked on March 11, and that the operative trend has switched from Up to Down.

The attached 180-minute chart of the Dow (marked "Bearish Engulfing A") shows an "imperfect" bearish engulfing pattern, in that the Real Bodies of two tall black candles, not just one, were required in order to fully engulf the small Real Bodies which preceded them and the Real Body of the tall white candle. This is not an "orthodox" Candlestick reversal warning pattern. Even so, I took it as a strong bearish warning; and so far, the Dow is in fact lower.

Follow up:

Click to enlarge

The attached 360-minute of the Dow (marked "Bearish Engulfing B") shows a nearly perfect bearish engulfing pattern. Here, the Real Body of the single tall black candle engulfed the small Real Bodies which preceded it and the Real Body of the tall white candle. I say "nearly perfect" because the top of the Real Body of the tall black candle just barely misses being higher than the tops of the small Real Bodies which preceded it. We're talking about small fractions of a single Index point here. I think that your eye will say, and I will certainly say, that "close is good enough."

Click to enlarge

Now please look at the third chart, which is the 30-minute chart of the Dow, updated through today. The Peak on March 11 was a very small "Shooting Star," which is a bearish warning when it appears at the top of a long price advance, as is the case here. I'll agree that it's not a very impressive example of a Shooting Star, but there it is, for what it's worth.

Apparently it turned out to be a very good warning. Please note the Bearish Engulfing Pattern which developed thereafter. The Real Body of the tall black candle engulfed the Real Bodies of the 14 candlestick bars which preceded it, which amounts to a lot of "engulfing," and is not to be sneezed at. "The proof is in the pudding:" the Dow declined strongly after the appearance of the pattern.

And then, on March 16 and 17, a second Bearish Engulfing Pattern emerged, in which the Real Body of the tall black candle engulfed the Real Bodies of the 12 candlestick bars which preceded it. This one was entitled to be taken seriously, too. The Index has indeed continued to decline, just as we expected it would, after the appearance of that pattern.

Click to enlarge

Further, we can count five clear Elliott waves downward from the peak. The fifth wave may not yet be complete, and we may have to revise that "lower end" which follows the second Bearish Engulfing Pattern in light of future events; but waves 1,2,3, and 4 are hard to miss. Here's the significance of five waves: Prices (or an Index, such as we have in this example) move in five zigzag waves in the direction of the trend, and in three zigzag waves in the direction opposite to the trend. Since the five waves shown on the chart moved in zigzag fashion downward, we take that as additional, confirming evidence that the underlying trend in the Dow is down. The down-move from the peak on March 11 is not just a "correction" or "pullback." The evidence continues to grow that it is the real thing.

Don't be greedy now; be smart.

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