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Chart of the Day / Trader Education: The Three Technical Patterns to Fear

Trader Education: The Three Technical Patterns to Fear

June 25, 2018

It is absolutely imperative that traders pay close attention to key technical patterns, especially when it could cost them thousands of dollars.

In June 2018, it was safe to say the market was in train wreck-mode.

In fact, on June 19, 2018, the Dow Jones fell more than 350 points on fears of trade war escalation with China.  At the time, President Trump threatened to impose another $200 billion of tariffs on Chinese goods if Beijing follows through with its promise to retaliate against our first round of tariffs.  “Further action must be taken to encourage China to change its unfair practices, open its market to United States goods, and accept a more balanced trade relationship with the United States,” Trump said.

Along with it came two key technical setups all traders should be aware of.

For one, the Dow Jones began to break through its 50-day moving average to the downside.

Should we break below that line in the sand, there is then the possibility of us challenging the 200-day moving average at triple bottom support at 23,500.

So it’s essential that traders be very well aware of even the possibility at the 50-day.

Two, we want to make sure that if the Dow Jones does break below its 50- and 200-day moving averages to test triple bottom support, we need to watch to see if prior triple bottom support remains in place.  If we were to shatter that line in the sand, the Dow Jones could set up for a incredible decline and become negative for the year.

Three, we want to make sure that the Dow Jones doesn’t fall through the bottom of a descending wedge pattern that appears to be setting up.

If it does, that could cause reason for concern, as well.

That’s because a descending wedge — a consolidation price pattern composed of lower swing highs pushed lower by an established downtrend made up of a series of swing lows – can lead to a breakdown in the markets. In fact, about two-thirds of the time, a descending triangle pattern can lead to lower prices, and greater fear of a more sizable shift to lower lows in the market.

Let’s look at a chart of the Dow Jones again for example with trend lines drawn.

One line is drawn horizontally connecting lines of support. The other connects the downward sloping price peaks atop.  Once you connect these you begin to spot the triangle.  Fear of further downside then begins to appear if the price of the index begins to make a sharp, meaningful move below the lower line of the triangle.

Of course, it’s always a wait and see with technical situations such as these.

This is the exact reason why it’s essential to pay close attention to technical set ups.