Price Action
The markets have been fairly turbulent in recent weeks. After a big sell-off that took the Dow Jones all the way down to 24,120, the markets bounced back and the Dow went on to hit a high of 26,278.
However despite this temporary strength, I think many traders and investors were wary that this may be a dead cat bounce and further weakness may be just around the corner, and this has proven to be the case so far because the Dow has since fallen back to 24,902 at the time of writing (based on the future price pre-opening).
Symmetrical Triangle and EMA Convergence
If you take a look at the daily price chart of the Dow Jones above, you can see that the price has been trading in a symmetrical triangle if you draw some trendlines connecting the highs and the lows of the recent price action.
Furthermore, you can also see that the EMAs that I like to use, ie the 20, 50, 100 and 200-period EMAs, have all converged and are tightly packed together.
Both of these chart patterns generally point to a possible breakout when they occur together, and with the symmetrical triangle getting smaller and smaller every day, a breakout is looking highly likely right now.
Trading Opportunity
At the moment the price is trading very close to the bottom of the triangle, and is therefore very close to breaking below the lower trendline and breaking out to the downside.
However it is still unclear whether the price is actually going to break below this trendline or whether it will find support at this level.
You would normally expect the price to continue falling, but we are now in Thanksgiving week, which is usually a very good week for the major stock markets, with the S&P 500 higher 75% of the time since 1945, for example.
So any downward breakout may be curtailed by a short-term rally during the remainder of Thanksgiving week, and with Christmas just around the corner, there could well be a Santa rally to look forward to in about a month’s time.
Therefore while this would ordinarily be a possible breakout opportunity, you have to be very careful if you are tempted to sell any downward breakout. Indeed I wouldn’t be at all surprised if the upper trendline is breached in the coming weeks.
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