Dow Outlook 081023 - Short Term Swing Trading Opportunity

Dear Friends,

The Dow fell by 514.45 points or 5.69 % to 8519.21 yesterday. Don't Panic! A further downturn at the next opening could represent a short term buying opportunity, at the right time.

It would seem that our hypothesis of a calmer, progressively narrower trading range is not working. However, let's take a look at the Daily Chart of the Dow to get a strategic perspective of the situation.

We can see that the Dow has merely fallen within its Triangle, which is much deeper in the process of formation.

Of course, if you compare this chart with the previous one in our Outlook of 081019, you will notice that I have broadened the Triangle's Support & Resistance Lines to cater for the latest price information.

If we believe in the Hypothesis that the Dow will trade in a calmer, progressively narrower trading range within this almost Symmetric Triangle, then, we may consider taking a Long Position on a Day Trading Basis, as it nears the Support Level of the Price Pattern. Our Initial Stop Loss would be just below this Upward Sloping Support Line, taking into account the potential for False Breach.

Let's take a closer look at the Daily Chart with all its Key Support & Resistance Levels plotted in, to see how we can prepare for a Swing Trade.

The lowest Support Level for the Triangle was at 7882.52. The next higher Support Level was 8197.67 whilst the latest Low set last night is at 8335.3.

I do not deem the latest Low as a firm Support Level yet at this stage, and thus, the more relevant Support Level is at 8197, i.e. the 8200 level. Thus, if we take a Long Position at close to 8350, and put an Initial Stop Loss Order at 8150, this would give us a trade risk of 200 points.

On the other hand, our Target Profitable Exit Level would be at 8950, just short of the 9000 Psychogical Resistance Level, and if everything goes well, this would yield a Target Profit of 600 points, for a Reward / Risk Ratio of 3 times, which is acceptable.

Of course, in life, there is no such thing as a sure thing, and here, we are working on a High Expectancy Trade, in terms of probabilities of success, and Reward / Risk Ratio.

Given the recent crash, and the number of government actions being put in place, I believe that the downturn is over done at present, at least from a fundamental perspective. Yes, problems continue to exist and drag the economy even lower in future, but perhaps the Dow has overeacted ahead of its time? Thus, from a Fundamental Perspective, i.e. for the Medium Term of 3 weeks to 3 months, I am inclined to adopt a Long Strategy rather than a Short Strategy at this stage.

From a Technical Perspective, the Dow is still in Price Formation mode, and if we MUST trade, then the trading strategy is one of Swing Trading within the Triangle. Of course, as the trading range narrows to a level where the Reward / Risk ratio becomes non meaningful, we should stop our Swing Trading Strategy and adopt a Volatility Breakthrough Trading Strategy, i.e. start looking for Breakout or Breakdown from the Symmetric Triangle.

The Short Term Trend is one of a Triangle Pattern Formation. The eventual move out of the Triangle will be for a longer duration, i.e. a Medium Term Trend.

So, the million dollar question is "What will be the direction of the Medium Term Trend after the Triangle Breakout?"

From a Technical Perspective, there have been two schools of thought on Symmetric Triangles.

The First school, the older, Traditional School, believes that Triangles are Trend Continuation Patterns, and if you believe this Hypothesis, then, the Dow is set for further downside, once it breaks down from the Triangle.

The Second School of Thought, whom I call the Scenario Planning School, believes that it is not possible to guess the future direction of the Symmetric Triangle, since it is symmetric in nature, and thus, the Bulls and the Bears are equal in strength. Thus, traders in this school of thought, are market direction agnostic, and puts in a Long Order just above the Resistance Level while at the same time, they put a Short Order, just below the Support Level.

In this sense, the Scenario Planning Traders plan for both scenarios and are not deterministic (biased in one direction) in their approach. They let the market take them through a trade as it unfolds. It is my opinion that this Scenario Planning School has superior ideas to the Traditional School. However, I am biased because I teach Scenario Planning in MBA course.

Anyway, this is my idea of the day, for a Day Trade / Swing Trade if we continue to believe in the Hypothesis of a Calmer, Progressively Narrower Trading Range within a Symmetric Triangle.

I have some last words of wisdom I would like to share before you decide to take the trade. Make sure you wait for a Short Term Market Bottom to form in the Lower Timeframe Charts of say, 4 Hourly or 1 Hourly before you take the trade. This should be the correct entry position of the trade, and not based on the rough figure of 8350 which I merely plucked from the sky as I have done in this example. I was merely giving an illustration of a possibility, and the actual number will be one that the market will tell you, and not me.

Happy Trading, and may you make lots of money on this opinion.

Lastly, please be reminded on the Liability Exclusion Clause, which is at the top of my blog page, i.e. that the final trading decision is yours, and I will not be responsible or liable for any losses you may incur from whatsoever reason. :)

Best wishes,

Ooi

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