DJI - crunch time

There has been plenty of comment over the last 12 months as to how QE is playing havoc with TA, and I'd say point and figure charts are not immune from this either. What P&F does show, quite graphically is the degree to which the 'influence' of QE has pushed markets up over relatively short periods of time. P&F charts are unique because they do not plot time on the y axis but the numbers in the columns denote months in the year, so it is possible to see how quickly some of these indices have moved over given periods.

The chart above is the Dow Jones Industrial (50x3) high low chart, which plots prices based on the (intraday) high/low level rather than the closing price. I'm finding these quite useful in these momentum driven markets. The column of X's which gave rise to that 12,500 price target coincided with the announcement of QE2 and while its was possible to trade the noise, what this column is saying is that the Dow rose (50 points x 17) 850 points before reversing - a rampant bullish move! Then there was another one over Dec/Jan of (50x21) 1,050 and on most recently on the bounce back post Japan of (17x50) 850.

It can be seen that these two most recent up colums have given price targets in the 14,000s; the 14,100 target was activated when the market moved back above the top of the column of 21 x's (12,050): the more recent target is INACTIVE but will be activated if the Dow fills that 12,500 box. You can see the Index is testing that previous high level.

This is also a 50x3 chart of the Dow but is plotted using the closing level of the index only. See how the market was rolling over 'perfectly' last summer after QE1 ended and before QE2 was announced. There was distribution, then the reversal and (although not plotted) active targets to the downside of 8,900 and 8,300. Then QE2 was announced allowing the bulls to come back in and run riot.

Look at that 28 box column of X's which gave the target of 14,200 - that's (28x50) 1,400 points to the upside before a 150 point reversal - wow! This was followed by a 26 box 1,300 move higher over Jan/Feb without a three box reversal. And the post Japan bounce took that previous high out, activating that 14,950 price target.

It can be seen from this chart that all those targets to the upside are now active. The market is trading way above its long term bullish support line (the thick blue line) but there are three other minor bullish support lines in place.

In summary, that both the high/low and closing charts are pointing towards the 14,000 level suggests to me that until the market reverses and gives some new targets to the downside (active or inactive), this is where we are currently heading. But beyond that, the ending of QE2 in June (or anticipation of through May) could very well prompt a sharp reversal. If and when that, or something else gives rise to a reversal, i'll review the chart accordingly. For now though, it all points higher.