There are some interesting clues which were evident in the markets before we saw the +4.8% rally which caught traders by surprise.
The Dow Jones index had fallen from the August high of 11867 to a precise Fibonacci 0.786% support level of 11,050 which also saw a key reversal in last Fridays trading session on higher volume. For the smart traders this should have provided a clue that there was certainly interest in the markets and especially going into the weekend with a strong close back towards the 11,225 support area.
However one days worth of a rally does not change a bear market into a bull market. We notice that the 11,700 area is still a major resistance level which has also created a minor Head & Shoulders pattern which may put further pressure on the index for the weeks ahead.
Also it is clear that a trading range has now formed between the new Pivot low of 11,037 to the high of 11,867. This range will clearly set the boundaries for both the bulls and the bears. If we manage to break on either side of this range then expect a sharp move to further test the recent frustrations that the month of September often brings to traders.
On the longer term charts the current move can be considered a consolidation to the downside. In other words this is a pause for breath before we see the move continue lower.
To turn this market around at least for the short term to the upside we will require a break above 11,580 to see a test of 11,867 followed by 11,980. Caution is also required in case we take out the low of 11,037 which could set the stage for the decline to continue to the downside and head lower towards 10,700.
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.