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Dow Jones Formed an "AB=CD" Pattern, Signaling Potential Trend Reversal

Dow jones Index Technical Forecast: Bullish

  • The Dow Jones Industrial Average has rebounded from the 23.8% Fibonacci retracement level at 26,585
  • The formation of a bullish “AB=CD” pattern may signal a potential trend reversal
  • Upper Bollinger Band (28,500) serving as immediate chart resistance, capping upside

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The Dow Jones Industrial Average (DJIA) appears to have formed a bullish “AB=CD” pattern (see chart below) in recent days. “AB=CD” pattern is a basic harmonic pattern and serves as a building block of the more complicated “Gartley 222” and “Butterfly” patterns. The pattern is formed by almost parallel AB and CD legs, which are similar in time frame and length (highlighted in red). The BC leg is usually the 61.8%-78.6% Fibonacci of AB leg. In the Dow Jones’ case, a bullish “AB=CD” pattern can be viewed as a minor correction within a major bull trend.

Dow Jones Index – Daily Chart

Wall street chart

When zooming out, the Dow entered into a consolidation phase in early September, pausing a five-month bull rally. Key support levels can be found by drawing a Fibonacci retracement from its March low (18,191) to September high (29,197). DJIA has touched the first Fibonacci retracement level – 23.6% at 26,600 – and has since rebounded. Breaking below the 23.6% Fibonacci retracement will likely open room for more downside towards the next major support at 25,000 – the 38.2% retracement.

Dow Jones Index – Daily Chart

Dow Jones Chart

The index entered its upper Bollinger Band, opening room for further upside towards the upper Bollinger ceiling of 28,500. Trading within the upper half of the Bollinger Band is usually perceived as bullish. Immediate support levels can be found at 27,850 (50-Day SMA) and then 28,500.

The Bollinger Band indicator is composed of three lines. The middle line is simply the 20-Day Simple Moving Average (SMA). The upper band is calculated by adding two daily standard deviations onto the middle line. The lower band is calculated by subtracting two daily standard deviations fromthe middle band.

The fourth quarter may see volatility rising amid coronavirus and US election uncertainties. Recent pullback in equity markets may prove to be another healthy correction in the medium-term bull trend. Read more about our 4Q forecasts below:

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— Written by Margaret Yang, Strategist for DailyFX.com

To contact Margaret, use the Comments section below or @margaretyjy on Twitter