DOW in Dangerous But Not Critical Condition

15 January 2008

IntroductionLast night, DOW lose about 250 points or 3% and fell from 8,448 to about 8,200. DOW is now in dangerous but not in critical condition. This is because the ADX has just reversed its direction but stayed below 20.


What's ADX?ADX is a acronym for Directional Movement Index, which is another very important index in Technical Analysis. ADX will tell the direction in the movement of a stock or index. When ADX is moving down and suddenly reversing its direction to move up or vice versa, it signifies a directional change in the movement of stock or index. One would expect the stock/index to move up or down depending on the changes. If ADX moves above 20, it usually signifies an accelerated movement and when it it moves above 30, the acceleration will intensify.

The following Chart A will illustrate with red circle identifying the up movement and blue circle identifying the down movement.


Why Dangerous and Not Critical?Earlier on, DOW formed many shapes and patterns. It finally selected the bearish one which is the rising wedge pattern. It then broke the supporting trendline that has been restricting DOW's movement since November 2008. Subsequently, it broke the 20-day as well the 50-day supports and presently hugs the lower Bollinger band with ADX changing its direction as shown in attached Chart B. This put DOW in a very dangerous position. However, the Bollinger band has only been expanded slightly and ADX is below the 20 critical line with the 10-day Stochastic chart in oversold region, these indications suggested that DOW was not be in a critical condition.

Trading Strategy?If one has no vested interest in stock or equity or index market, it will be good to stay sideline until the situation has improved. For those with vested interest, it would be advisable to set targets for loss cutting or prepare to buy Put Warrants to hedge or compensate for the expected losses to be incurred should there be a serious downfall in stock market. Invariably, there will investors who would want to take the chance to short sell the market or go bargain hunting during this period.

Disclaimer:
Information here is for sharing and learning. It is not intended to give any advice on any stock or movement or trend of any index. If a price or movment of a stock/index is given, it is only intended for illustration. The reader shall verify the information given here before using them.