Talking Points
-Dow Jones has been trading sideways since last Wednesday as SSI shifts towards bulls
-Triangle pattern is our technical roadmap for price suggesting another 5-7% selloff
-DJIA support near 16,500 and possibly 15,750
Dow Jones Industrial Average (DJIA) has been trading sideways for the past 3 trading sessions. DJIA closed yesterday near their closing level for March 23. Running into a holiday weekend, it makes sense that activity and volume was muted.
The sideways price action in the US30, a CFD which tracks the DJIA, also provides a clue about the market's respect for the technical pattern noted in previous reports (see links at the bottom). We have previously highlighted a potential triangle pattern that may trigger a selloff of nearly 5-7% towards 16,500 and possibly 15,750. Prices don't have to fall, but using the triangle as the road map, look for some softening in the coming days.
Above 18,000 we can consider the triangle pattern to be voided and we'll shift our roadmap to our alternative technical patterns.
Inspecting FXCM's trader positioning (Speculative Sentiment Index) shows a subtle shift below the surface. The number of traders positioned to the long side is growing at a pace of 21% above levels seen last week. On the other hand, the traders positioned to the short side are shrinking to a tune of 14.1% below levels seen last week.
There are still nearly 4.5 times as many short traders versus longs but this number is shrinking. This subtle shift suggests traders are buying the sideways move or using the sideways move to close out previously opened short positions.
For those unfamiliar with SSI, sentiment is used as a contrarian signal. Since traders are becoming more bullish while closing out shorts suggests the door is opening to the downside. This also supports the triangle pattern interpretation.
For a trader looking for an entry, a break below 17,396 will confirm a series of lower highs and lower lows. A trader could use the break of 17,396 as a signal to enter a short position with a risk level near the 17,651 level.
Traders could also look to sell on a bump higher. We highlighted this scenario in this March 22 report.
Suggested Reading/Viewing:
Dow Futures Down as DJIA Selloff Has More Room to Run
Introduction to Sentiment Trading [5 minute video]
---Written by Jeremy Wagner, Head Trading Instructor, DailyFX EDU
Follow me on Twitter at @JWagnerFXTrader .
See Jeremy's recent articles at his Bio Page.
