By Chris Diodato – TradersBase.com
Yesterday, after the market closed, I was celebrating. Why? Yesterday’s price action was an obvious signal that demand had once again taken over the market. The pattern I was watching was a two day pattern called a “bullish engulfing.” This is a pattern that occurs when a market makes a sudden intraday shift that changes market control in favor of the bulls.
Here is the ETF for the Dow Jones Industrials. I used the ETF because the actual index does not allow for gaps during the market open. The actual bullish engulfing pattern is within the white circle.
To add to the bullish evidence of this pattern, this bullish engulfing appeared on high volume, relative to the last few days. As expected, the market is now showing some follow through today with another day gapping up. Notice also, the yellow channel I drew on the chart. With that, we will find our next target for the Dow.
The breakout above those two yellow lines today is a buy signal from a “flag” formation. These are short term continuation patterns that are usually followed by a swift movement of stock prices in the direction of the breakout. Here is our target.
The target of 13,450 actually corresponds pretty closely to the congestion area of the market during September and October. I would expect the market to meet some resistance there before proceeding to new highs.
For those who want to buy into this rally, but are still nervous, flag formations often pull back after breaking out, giving a very small window of opportunity to buy at an excellent price, making the trade very low risk.