Dow Jones with potential Bull Flag or Broadening Formation

DJ:DJI   Dow Jones Industrial Average Index
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Back from late November into mid-December, the DOW was moving within the confines of a falling price channel which turned out to be a Bull Flag when it broke out on some Taper BS. Now we're looking at the same type of formation, but it's slightly different this time as we also have the potential of a Broadening Formation.

This particular Broadening Formation does not fit the technical definition as in the true Broadening Formation you would have a series of higher highs and then some lower lows. These highs and lows would create a pattern that looks like a megaphone. You can see the megaphone pattern, marked with the falling solid green line, but this is a falling megaphone. A true Broadening Formation should look like the reverse of a pennant so this does not meet that definition. Still, it's there and you have to wonder it it's legitimate. To prove to be legitimate, the DOW would have to be repelled by the upper falling line and then drop below the recent lows in the 16240 area.

Here's the problem I see with the current situation: We've been stuck in a sideways price range for almost a month and while we don't seem to be able to break to new highs, we haven't made any significant new lows. We're basically just churning, which is something you see when the markets are under distribution. Perhaps more important is that the DOW pushed higher on heavy volume this past Friday but was not able to hold its highs, closing 40pts off those highs. While AXP             , V, and GS             rallied nicely on Friday, 21 DOW components closed in the red. So the DOW financials saved the day and as long as these don't falter on Tuesday and as long as other DOW components join in the fun, then we should break out of the Bull Flag and we're off to the races again. However, if the DOW does not rally on Tuesday because of the large shadow cast by INTC's announcement of no growth for 2014, then you would have to be on the look out for a test of the 16240 area and perhaps a failure there.

Also, there is a very clear double top formation in the $SPX             and there is trouble in tech paradise and big tech has been the leader of this rally. If the $COMPQ does not shrug off INTC's warning and continue to rally and if $SPX             should confirm the double top with a close below 1815, then you should expect lower lows ahead.

Of course, I could be totally wrong and the DOW and other majors just take off on Tuesday and never look back. I would imagine that market direction will become much clearer in the week ahead.

All IMHO and subject to change without notice. GL in the week ahead.
motleifaul, I took a look at the March-November period of 2012 and I'd love to see something like that as a similar market environment would offer several trading opportunities as sideways markets offer few if any unless you're a very adept day trader who can catch the bottoms and tops of these large intra-day swings.

Thanks for your comments.

SimGlenn, as of right now, there has been no technical damage done, IMHO. We're just grinding sideways. Based on recent past history, this consolidation phase should end with a break to the topside, but that view may be too narrow and in times of uncertainty, which we're in now, one must consider and be on the look out for a move either way. Also, it's important to note that while the $SPX has gone up on average about 1pt per day since March of 2009, that is not the case going back to May of 2007 or early 2000 and if someone bought the QQQ in late 1999 or early 2000, it has taken many of these nearly a generation to get whole while others wait for the QQQ to get back to $100.

In 2012, the $SPX rose about 13% and while the markets seem to have been a magical money machine during 2013, this is the exception as average returns, on a year over year basis, are more in the 10% to 12% range.

This coming week is going to be full of important earnings from JNJ, MSFT, NFLX, and many others. MSFT is expected to have earnings of .63 cents vs last year's .76 cents for the same period. That is not growth and yet MSFT is up nearly 45% in the last year. If MSFT's earnings are down more than 10% from last year, then how will the market deal with this? Can the market continue to ignore these kinds of disconnects? Was INTC's warning just a one-off or a shot across the bow? I guess we'll find out soon enough.

Meanwhile, I'm just going to be watching closely how events unfold in the coming weeks and while I would love to see a nice big pull back here followed by a nice buying op, the market may have other things in mind. Certainly the mystery of which way we go from here will be solved soon enough.

Thanks for your comments.
Curtis - No doubt the SPX hit trend-line resistance late 2013 when it parked right at 1850, which was the Y/E upper channel. There simply is little room on the upside without breaking trend creating a bit of a "buyers' strike". There seems to be neutrality between buyers and sellers. A sideways movement in a well established uptrend should be bullish since each day adds to the potential in accordance with the uptrend, e.g., about 1 SPX point per trading day. Monday's upper channel will be about 1865, so there is slow trend-line relief coming, as equity inflows accumulate, leading to the next advance.
Overall, I don't see a bearish pattern forming yet, and the market seems to be in a digestion phase after a strong second half of December. I would see trouble if mid-channel is breached near 1800, since that may precipitate a test of lower channel near 1740. Bottom line is that there simply is little upside room unless there is a significant catalyst such as better than expected earnings. That is not happening this Q.
Thank you for this interesting view.
Also possible is a coming range trading tat can last for months as it was between March and October last year. We then had a long lasting consolidation zone after the rise since November 2012 which also ended in a flag and even the breakout on the top was not followed by a continuation of the rally.
Such a consolidation would be healthy for the market as well today. The range would then be from high to low of the "flag-megaphone". I prefer this scenario. The days coming will be interesting with a probable test to the downside. I think that it will be not unwise to play both ways -up and down- reluctantly.
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