The Dow Jones takes the bears by surprise

While most traders were expecting a slide in the Dow Jones index, the market surprised them with a perfect Fibonacci retracement. So what next for the Dow?

What a great market I have to cover in this, my last article of 2011.

My headline last Friday was The Dow reaches a crossroads where to now? It could not have been more apt, following the 'surprise' rally of over 300 pips yesterday.

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In Friday's email, I stated: "But with the markets having fallen so far, it would be easy to get complacent, or even perhaps cocky. If you are new to trading, I must warn you that this would be very dangerous. As I have said on numerous occasions, markets manage to fool the majority and will turn around just when the majority least expect it."

And fool the majority it certainly did yesterday.

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Why do I say that? Because on Friday, by one respected measure, there were only 10% bulls.

The majority were evidently expecting follow-through down moves. After all, the news was bleak, especially from the eurozone, so that made sense, did it not?

But as the great trader Joe Granville once said: "When everybody thinks something is obvious, it is obviously wrong".

On Friday, the market was challenging the upper tramline, but it had one more dip to come. The market was evidently following my 'alternative scenario':


(Click on the chart for a larger version)

Trader tip: There are always alternative scenarios. No forecast is 100% certain. All we can do is assess the various odds using the methods I describe (or others, of course).

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Being suspicious of the move off the 8 December high because the waves down were highly overlapping, as well as that potential A-B-C pattern - I was on high alert for a sudden reversal.

A perfect Fibonacci retracement

That is why I decided to place my Fibonacci retracement levels on the previous major wave up from the 25 November low:


(Click on the chart for a larger version)

And just admire where the bounce started from the precise 50% retrace of that wave in the 11,700 area!

If anyone doubts the usefulness or validity of the Fibonacci method, then just show them this chart.

The reversal was confirmed first when my upper tramline was penetrated, and then when the resistance zone at the level of the previous significant high (within the tramlines) was also breached (marked by pink bar).

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Those were great places to take profits on short trades, and then go long this is called reversing your position. It is a strategy I use occasionally, and is perfect for the current situation.

Where to now for the Dow?

OK, I now have a rallying market where is my first target? I need to draw a third tramline above the previous upper one:


(Click on the chart for a larger version)

The market hit my third tramline last night and is now attempting to break away upwards.

I have also drawn in the new Fibonacci levels to the wave down from the 8 December high to the recent low. The market has rallied past the 62% level and is this morning approaching the 76% level. That is one fast move.

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Recall that previously, I have noted that many of the deep upward retracements have carried to this 76% level and then turned back down. Will history repeat?

I have a feeling that it won't happen this time. There are simply too many bears out there who will be squeezed and there is still time for a terrific Santa rally.

My feeling is that we shall see moves above the previous 12,300 high soon. But near-term, the market deserves a breather, as it has made a very strong impulsive move.

The Fibonacci 76% level at 12,150 area, which is the current market this morning, would be as good a place as any for that pause.

But if the rally eventually continues, where is my target?

For reasons I will explain in a future article, a probable target is in the 12,350 12,400 area, provided the old high at 12,300 can be taken out.

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As I mentioned, this festive period promises much action, despite the lower trading volumes that are traditional at year-end and traders need to be on their toes if they want to capture the large swings, and avoid being side-swiped.

These are perfect trading conditions for active traders, and remember, the markets do not respect the two- or three-week break we in the UK are used to!

My next article will be on Wednesday 4 January and much can happen in the meantime.

I am planning to offer an exciting one-day trading workshop in the New Year, which will be exclusive to a small group. I will have further details in January.

Finally, I would like to wish all my readers a safe and happy holidays.

If you're a new reader, or need a reminder about some of the methods I refer to in my trades, then do have a look at my introductory videos:

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