Long Term Chart Symmetry
Dow Jones Industrial and SP500
Euro-dollar
Daan Joubert
Over the years, various analyses based on Chart Symmetry have been published here and elsewhere on the internet. Recently the focus of the reports has been on monthly charts of the US 10-year bond and of Gold - charts that showed the US 10-year note has a 25 year market support level at about 4.32% for the end of January, while the similar key support for the 30-year lies at 5.02%
Today we use Chart Symmetry for a long term look at Wall Street and the euro-dollar and sterling dollar rates. Using weekly charts, the analyses cover about 11 years of history- long enough to obtain a view of what is likely to happen over the next 2 or even 3 years.
Readers who have not read about Chart Symmetry should first read the Appendix where a brief summary of the methodology is give.
Dow Jones Industrial Index. Weekly close
The master gradient, identified as line M, was generated as the overall support line of the whole move since 1994. The first point used for the line is not tangent to the price, but is the centre point of a small bifurcated bottom, as shown in the next chart, which covers the relevant period at the start of the bull market. Experience has shown that such centre points often are located on major trend lines, as in this instance.
Lines A and B are steeper derivatives of line M, with F1 and F2 shallower derivatives. F1 is shallower than M by the Fibonacci ration, and line F2 is again shallower than F1 by the same ratio.
The fit between F2 and the recent high is quite good, given that F2 is a derived line from a point about 5 years prior to the recent high. On that date, the Dow Jones Index closed at 10827, while the value of the derived line, F2, was 10811. The margin of error is 16 points, or 0.14%.
Chart Symmetry has illustrated over the years that the boundaries of major patterns are Fibonacci related; that is, the one boundary can be derived from the other by means of the Fibonacci ratio, and generally with high accuracy. This implies that F2_m is such a major chart pattern and thus that the recent high is likely to remain in place for some time.
Pattern F2-M is a very large asymmetrical Fibonacci triangle of which leg three has just been completed. If leg 4 is to complete normally - as happens in a large percentage of such triangles - the Dow Jones is now on its way down to line M again. Line M currently has a value of 8647 points.
SP500. Weekly close
The master line is again the overall market support of the long term market, similar to the analysis for the Dow Jones, above, and generated through the points indicated by the two 'x's. Here, too, the point used on the left is the centre of a small bifurcated bottom.
Lines X and Y are parallel to M, generated from the points of origin marked with a 'o'. The close to equal spacing of the three lines adds to the confidence about their positions.
Channel D-A is the steeper derivative of M - as opposed to the Dow Jones where the recent high approached the all time high, and therefore required a shallower line than the master line to fit the chart, here a steeper line is required to reach the top of the recent bull market. The similar good fit of the Fibonacci line is therefore not due to similarity in the shape of the charts.
Channel A-D displays a symmetry often seen in major channels, where, instead of the more common centre line (as we see in channel X-Y-M) there is a narrow centre channel.
Here, too, pattern A-M is a large Fibonacci triangle, with the SP500 having just started on leg 4, with line M as the natural destination, in due course.
The euro-dollar rate
The weekly chart of the euro-dollar rate shows three channel system - all derived from the gradient of master line M.
Line P is parallel to M; channel A-E is a shallower derivative, while channel X-Z is a steeper derivative of line M.
The key question, that should be answered within the next week or two, is whether the US dollar will continue to firm into the lower half of channel X-Y Z or whether it will rebound off line Y to test dollar support at line B again.
A break below line Y will be bullish for the dollar over at least the near to medium term; on the other hand, a rebound off line Y could turn very bearish for the dollar should the support at line B not hold.
Conclusion
In terms of the Chart Symmetry analyses, the outlook for Wall Street is not very rosy over the medium to longer term.
Despite short term rallies - provided they do not break clear above the large triangular patterns, the technical targets over the longer term are below the 9000 point level for the Dow Jones and probably approaching 900 points on the SSP500.
There is no easy identification of how much time this will require and speculation about this will not serve any purpose in the absence of good technical guidelines.
The dollar is rallying against the euro and most other currencies, and that might well have a slowing down effect on the ruling bear trend on Wall Street. If the dollar should fail to break lower in its bull channel, and instead break higher above important dollar support, the slide on Wall Street should accelerate.
Appendix:
Chart Symmetry is a method of chart analysis based on observations that we had made quite some time ago and incorporated in custom software. The observations are:
- Prices tend to reverse or change trend along preferred gradients. A preferred gradient is revealed by suitably placed, parallel trend lines, or channels, that pick up far more small and large reversals that what one would expect
- There are more than one set of such preferred gradients, in both directions
- The different preferred gradients can be converted into each other through the use of the Fibonacci ratio
When an analysis is done with Chart Symmetry, the methodology is quite rigorous. One has to begin with a single trend line, generated between two significant points on the chart and which has been successfully evaluated as being a preferred gradient. Using this now known gradient, additional lines are generated - this time from just a single point on the chart - that have gradients which are
- the same as that of the master gradient, i.e. parallel to the master line
- the inverse of the master line, i.e. the same slope, but with the sign changed
- different gradients, steeper and shallower, that were derived from the master gradient
These lines are then used to identify various patterns on the chart that enable the analyst to draw conclusions and make assumptions about the future behaviour of the price.
Reactions at pattern boundaries are either firm reversals or breaks that lead to strong and sustained moves in the price. The reactions as a rule occur very accurately along these lines, even after a period of many years on monthly charts. Variations between the point of reversal and the trend line are often less than 1%, even after periods of 10 and more years, which makes Chart Symmetry perhaps the most accurate of charting methods.
Season's Greetings
Kind regards to all and happy trading.
daan joubert
January 2005
daanj@kingsley.co.za
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