The market at a critical juncture

Many apologies for my recent absence. I came down with a severe case of writer's block—I just couldn't seem to be able to put anything into words. This malady has stricken me before but this time was one of the worst. But now the cloud is lifting and (hopefully!) I will be solidly back on track. There's a backlog of topics I wish to cover but I feel that talking about current market conditions is the most pressing at this moment.

What the charts are telling us

The Dow Industrials
To gain a clear perspective of current market conditions, one must look at charts over various time frames. The monthly chart of the Dow Industrials highlights several interesting features:



A head & shoulders (H&S) pattern began forming in the latter part of 2006. The pattern ended in mid-2008 with the breaking of the right shoulder at 12200. Technical analysis tells us that we can expect a continuation in downward momentum of at least 1800 points (the distance from the neckline (12200) to the top of the head (14000)) to the 10400 level. You can see from the chart that this is a strong area of price support.

Unfortunately, this level was broken last October. For the past several months, the price has been oscillating between 8000 and 9000. If it breaks above 9000 on heavy volume, chances are good for a continued rally.

On the flip side, a break below 7800 should serve as an alert for continued downward movement; a break below lower support at 7500 and the bears will really have a field day.

Aside: There's also an inverse head & shoulders pattern that began in 2001 and ended in 2005 with the neckline at 10800 and the head at 7500. This gives an expected point rise of 3300 points (10800 – 7500) to a level of 14100 (10800 + 3300) which is indeed where the Dow ended up before turning right back around.

The S&P 500
The quarterly chart of the S&P shows a distinct double top formation. This pattern was over 10 years in the making. The neckline is at 800 with two peaks just over 1500—a 700 point difference. Unfortunately for us, a double top has similar implications as for a head & shoulders formation which means that if the price breaks through the current neckline level, we could be looking at a catastrophic fall to 100. The fall could be mitigated by the support level at 450, but let's keep both fingers crossed that this scenario will not pan out.



The Dow Transports
The Dow Transports are considered by many to be an early indicator of market direction. Its monthly chart shows that it's rapidly closing in on major support around 290. If it breaks through that, we could be facing another 100 point drop to its 2003 low at the least.



Summary
These charts of the major market averages are showing us two things. The first is that to glean an accurate picture of market conditions we need to look at charts over multiple time frames. The second is that the indices are all poised at critical support levels and should these levels not hold, we could be facing a massive breakdown of Titanic proportions.