The Chart du Jour

Diamonds in the Sky

October 15, 2000

By, Barclay T. Leib

The locker room banter may be of relief and rejoice given last Friday's equity market rebound, but is this rally likely to last?

In today's susbcriber-only article, we focus in on the intermediate to short term picture of the DJIA, and discuss whether this picture represents a classic Diamond Reversal formation, or not. If it does, what does that imply for downside price targets short and longer term? Where should the current burst of strength peter out?

Never heard of a Diamond Reversal, you say? Well, here's just a snip-it from Edwards and Magee's classic text Technical Analysis of Stock Trends:

“The Diamond pattern is not a common pattern….Its ‘natural habitat’ is Major tops and the high-volume tops that precede extensive Intermediate reactions…Diamond reversal formations are often easier to detect on weekly than on daily charts….It carries a minimum measuring implication [that] prices should move at least as far from the breakout point as the greatest width in points of the pattern from its top to bottom. This, it must be emphasized, is a minimum rule…Generally, the new trend carries prices eventually well beyond the minimum measurement.”

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