The downside objective had been 10700 but the index put in a low at 10827 and has since staged a rally of +6.7%. However, although the thrust appears to be impressive the internals still appear to be weak and momentum indicators have still not provided a buy signal.
Also, the VIX index which is a measure of volatility had indicated that a rally was due and many traders watch this for signs of extreme levels in the markets. Previous signals have suggested that if we are to see a rally take place then a +12% move could be expected.
Together with Fibonacci price levels this would indicate that the Dow Jones could target 12,300 before finding major resistance. For now though we should look towards the 11,700 level as a minimum price retracement which is the Fibonacci 38% level from the May high.
For caution, I would regard the 10827 low as a key level which if broken may take the index lower towards the 10,700 level and possibly lower. On a short term basis the 11,225 level is also one to watch for as this is the 127% Extension of the may high. If the 10827 low holds then Wave 5 may be completed and ready for a counter trend rally.
Text book theory suggests that markets which decline by -20% are cheap and although we are in this zone, this does not mean that we should jump in and buy. It has been proven that markets often retest a key level and a failure to break important support levels, often provide an opportunity to get on board. But more importantly this would provide further evidence that a low could be at hand. This requires patience and discipline and that is a successful trait of a professional trader.
Certainly we could rally higher but let’s be patient and wait for the market to tell us it is ready to offer profits.
Sandy Jadeja is Chief Market Strategist for ODL Markets and founder of www.Spreadbettingtowin.com where he teaches low risk trading strategies and money management.