This chart was created on 10 Oct. 2001 as I was preparing these notes. The October 2000 to October 2001 time period has been rich in technical formations. The formations shown are: A trading range from November 2000 to March 2001. The bottom of a trading range acts as a support level, and the top as resistance. We look for an eventual breakout of the range. In this case, it broke out to the downside signifying a trading opportunity on the short side of the market. A double bottom formation in mid-March to early April. This formation gives a buy signal when the second bottom is higher (or equal to) the previous bottom. In this case that was in early April, though it takes a few days to be sure of the signal. A second buy signal was generated when the resistance level from the previous trading range was broken. A Descending Triangle in May and June. This formation, which I find to be very reliable, is expected to break out to the downside. It did. Another Descending Triangle from mid-July to late August. Again, it would be expected to breakout to the downside. It did, even before the September 11 tragedy. The last formation shown was the gap down after the 11 Sept terrorist attacks. As noted on the chart, gaps are usually “filled” (that is, prices eventually should move back to the level before the gap). After a gap is filled (or, on a candlestick chart they say, “the window was closed”), prices will often reverse for at least a short time. The level at which the gap began becomes a resistance level. In fact, the gap was closed one month later on October 11. On October 12, the index declined by 66.29 points.
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