Triangle Action

There’s much discussion occurring regarding the triangle formation occurring in the major US Equity Indexes.  Let’s focus for a moment on the DIA (Dow Jones ETF) and see this triangle in action.

DIA Daily chart:

The structure is still the same – price is in a confirmed downtrend with price making lower lows and lower highs, and the orientation of the key daily moving averages is in the most bearish position possible (20 beneath the 50 which is beneath the 200).

There are two interesting divergences playing out and perhaps resolving:  First is the positive momentum divergence that set-in on the November price lows which preceded the current ‘rally,’ while the second divergence is the non-confirmation from volume into the recent rally – albeit we are experiencing “holiday volume” which throws off volume analytics for the time being.

The 50 day EMA continues to supply price resistance, while price meanders through its flat 20 day EMA.  Moving averages have less significance generally when they are ‘flat,’ or the market is in a consolidation phase (as is evidenced by the current price contraction which resembles a triangle formation).

It would be significant if price could break above the $90 level or beneath support at the $80 level.

Let’s pull the perspective back and add in a key possible Elliott Wave count.

DIA Weekly Chart (with selected Elliott Waves):

I’ve simplified this chart because I want you to focus closely on the triangle pattern that has formed on the chart – it’s much more evident in the weekly chart than the daily.

Whatever you want to call this move, it is clear that it is a consolidation pattern that can also be known as a “corrective” or ‘counter-trend’ structure.

Going back to the price structure, price remains in a persistent downtrend which is confirmed by the structure of the key weekly moving averages (again, now in the ‘most bearish orientation’ possible).

This Elliott Wave count assumes that we are still in the larger scale Wave 3 down which has been horrendously destructive to investors, and that fractal Wave 5 is perhaps yet to come… and soon.

Should price manage to break to the upside, it would find key resistance via the falling 20 week EMA around $95 per share (Dow 9,500)… but the odds seem to favor a potential downside break which would take price to new lows into 2009 perhaps to the $70 to $73 level (Dow 7,000 to 7,300).

We’re at a critical cross-roads, and just a push in either direction could send funds scrambling… to buy or to sell together.  Watch the market very closely, and be prepared for a trend move (impulse… or breakout of consolidation) at any time now.