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Dow breaks triple-top

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Today's trade at Dow Industrials $9,950 was something a lot of bears didn't think would take place anytime soon and demand looks to be back in control near-term for this widely watched market average. We do expect some psychological resistance at the $10,000 level, but I personally think a move near the $10,100 level over the next several sessions is a possibility.

Dow Industrials Chart - $50 box

Today's "triple-top" and resulting buy signal at $9,950 has us performing an early bullish vertical count that currently hints at the $10,700 level as a longer-term bullish target. If we look back to the "first buy signal" off the bottom, we see a vertical count back in October (red A) than hinted at $10,500. The Dow came short of that vertical count by about $200 in January (red 1) of this year, before the bullish % turned south (lower) and internal weakening took over from an "overbought" level.

Dow Industrials Bullish % Chart - 2% box

This morning, Austin Passamonte turned bullish in the index options market for the DJX.X prior to the Dow Industrials (INDU) trading the $9,950 level. That was a "common" move by aggressive bulls in front of what they felt may turn out to be a breaking of near-term resistance. When we look at the bullish percent chart of the Dow Industrials (just 30 stocks) we see a market that is currently in "bull correction" status. Last nights reading had this group of stock at 53.33% or 16 of the 30 stocks showing a buy signal on their point and figure charts. A reading of 56%, or 17 stocks, showing a buy signal would have this major market average back in "bull confirmed status."

For the Dow trader, this information is more important perhaps for that trader than it is for a broader market bullish percent like the S&P 500 (which measures buy signals for 500 stocks). However, the Dow Industrials bullish percent is good for trader to be monitoring if they are just trading the Dow Industrials and options in the DJX.X.

With "market psychology" still a little shaky, the psychological 10,000 level comes into play. A break above that psychological level could well give a lift to investor psychology. For now, the supply/demand picture looks bullish in the Dow Industrials.

I'm also monitoring the Dow Transportation Average (TRAN) very closely. Today, the TRAN is stuck near the unchanged level so I'm not getting much of a signal of bullishness or bearishness. Last night in the premierinvestor.net wrap I mentioned how this index closed right on its downward trend that dates clear back to May of 1999. Until I see some type of major divergence and break above this downward trend, I'm still cautiously bullish. The TRAN is currently trading at the $2,730 level and a move above the $2,840 level could well have the wheels coming off the bear's wagon. Conversely, a break below the recent lows of $2,600 could have the bulls looking for repair shop.

Many of the indicators still tell us to be rather defensive, but we are starting to see some signs of renewed bullishness since the January round of profit taking.

Jeff Bailey
Senior Market Technician
Option Investor

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