Dow double-top at 10,000?

This chart shows how double-tops work. Look at the second half of 2007 and there is a classic double-top for the Dow Jones Index at 14,000.

That, as we now know, marked the top before the long swing down to the 6,500 level in March this year. Since then we have seen a record breaking rally up to 10,000.

Double-top

So 10,000 once, 10,000 twice and then back down again? These upward resistance levels do tend to be tested twice, and a double-top is one of the most reliable chart indicators.

Of course, this technically over-bought position also has to be undermined by fundamentals. Valuations are hugely over-stretched so it would not take much to change market sentiment from buy to sell at this point.

Perhaps it will be a realization that the ‘New Normal’ of high unemployment and sluggish growth just does not merit astronomical valuations. It could be a currency upset.

Over-bought stock market

Just to say things are ‘no longer getting any worse’ and to declare profits down 30 per cent when the market was told to expect 35 per cent is not going to support the Dow at 10,000 for long. The correction when it starts will be as long and deep as the rally, and might test a new low.

This correction should be much easier to trade than the rally. It is far easier to see the March rally on this chart than it appeared at the time. Right up to the 8,000 level it could easily have been a part of the overall downtrend.

Indeed, perhaps 8,000 was fair value. Again 10,000 looks like the over-reaction and market top, and should be confirmed by a double-top.