Pinch Me 2

Pinch Me 2

March 19, 2018 Off By Chuck

The chart of the Dow Jones Industrial average (DJIA) below shows how the index is currently making lower highs and higher lows. This, of course, is a what forms a triangle pattern. Price ping-pongs between a declining upper resistance and inclining rising support and as you can see is approaching the apex. These patterns are famously fickle and provide little to no investing edge so I am pointing out only for recognition’s sake. If you want to read more on triangles, I wrote a post in 2014  called “The trouble with Triangles”

Instead of spending more time whining and complaining about triangles I instead wanted to introduce another indicator I personally use but do not usually add to charts I post on the blog, Bollinger Bands (BB). The bands do nothing more than measure volatility, based on a specified standard deviation, around a moving average. The bands automatically widen when volatility increases and narrow when volatility decreases.  Without going into more detail and put you all to sleep, the take away from this is to notice how the (orange) bands are once again pinching together. This type of sideways action usually portends to an impulsive move, unfortunately (and why I dislike triangles) the direction is a coin flip. Take a look at the examples on the chart where this same pinching action occurred in the past (look left). You can see as the bands pinched together, the DJIA almost always eventually moved impulsively to the upside and went on to test the upper limit of the band. Those long the stock market should be very interested which direction the DJIA moves out from the pinch as it will tell us who won the battle inside the triangle. In technical analysis we always have to give the benefit of the doubt of the prior trend, but the sloppy action off the recent February lows has me doubtful the bulls have control. Regardless of which way it goes, I expect it retest to prior highs/lows of the triangle toot sweet.