A 'double-pop' in the Dow Jones

published 2 September 2011

I am trying desperately to find a word for the opposite of 'dip' as in 'double-dip' and I have decided on 'pop'. Why?

Because since I wrote on Wednesday, the market did come off the pop to the 11,600 area, but then popped up again to yesterday's spike high at 11,715 and then embarked on a rapid descent to the current 11,450 area.

Recall that I had set sell orders at 11,600. The retreat from that level allowed me to move my protective stop down to break even, following my break even rule.

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My stop was touched later on Wednesday for a break even trade.

Trading tip: When trying to pick tops, I have found that the most effective strategy for order management is to identify a possible top as I did from my tramline, Elliott wave and Fibonacci analysis in my last post.

Then I set a resting sell order there (with protective stop at 3%), and most of the time, the market will move into profit quite quickly. Then, I bring in my break-even rule in case the market moves up even higher.

I may have to do this several times (see my efforts in gold around the $1,620 area!) before I find success.

But if I have found a big top, the effort will be very worthwhile.

OK, let's see what the updated chart looks like:

(Click on the chart for a larger version)

The market is still toying with the fourth tramline, but this morning, it is backing off.

There is a clear A-B-C corrective pattern off the 10,450 low, and wave C is almost equal to wave A in height a very common relationship.

The odds are very much stacking towards yesterday's 11,715 high being my wave 4 (see posts) in the very large Elliott wave pattern starting from the 12,800 April high.

The next wave will be wave 5 to below the old 10,450 low.

The Dow has broken through one support level and is testing a second

On Wednesday, I identified two support levels where sell orders could be placed. The first has broken, and the second is being tested as I write:

(Click on the chart for a larger version)

Short trades placed at the upper level (11,550) can now be protected with a break-even stop.

But what is giving me much more hope that the downtrend has resumed is the shape of the decline from yesterday's 11,715 high.

Below is a short-term chart showing a pretty clear five-wave structure down to this morning's low:

(Click on the chart for a larger version)

The market has started on a new leg down

The third wave is strong and deep, thus following one of the guidelines I use.

That is what I am looking for as it confirms that we have started a new leg down, according to Elliott wave theory.

This morning, the market is trying to rally. And it might, but rallies are there to be sold!

It might even try to get back to my fourth tramline in an A-B-C pattern. Wouldn't that be pretty?

Note the potential positive momentum divergence here, which may support a rally.

But, of course, the actual fifth wave may lie at lower levels, and we may have more downside to go before any meaningful rally.

The support marked by the yellow bar in the second chart may just collapse. That would strengthen my case for yesterday's high being the top.

Trading Tip: Elliott wave theory gives you an indication of the way ahead, based upon time-tested patterns that have proven themselves over many years and in many markets and in many timeframes.

I willbe posting the second of my video tutorials on Monday an introduction to Elliott waves.

It is a short, easy-to-grasp lesson in which I use two of the basic Elliott wave concepts along with a few guidelines. I'm sure these ideas can help you in your trading performance and are well worth the effort in learning.

Incidentally, I shall be taking a short break next week and will return on Thursday.

Don't miss my next trading insight. To receive all my spread betting blog posts by email, as soon as I've written them, just sign up here .

John is is a British-born lapsed PhD physicist, who previously worked for Nasa on the Mars exploration team. He is a former commodity trading advisor with the US Commodities Futures Trading Commission, and worked in a boutique futures house in California in the 1980s.

He was a partner in one of the first futures newsletter advisory services, based in Washington DC, specialising in pork bellies and currencies. John is primarily a chart-reading trader, having cut his trading teeth in the days before PCs.

As well as his work in the financial world, he has launched, run and sold several 'real' businesses producing 'real' products.