Broadening Top in the Dow Industrials

So here is a quick snapshot of the Dow Jones Industrial Average and its broadening top formation. This one has been forming since the end of January and I think it’s pretty clear. Consider this one another feather in the hat for the bears.

2-25-13 DJI

This particular type of formation is fascinating to me because it frustrates everyone. Here’s the psychology behind it: Take the lows from back in early February and you have the bulls saying, “okay, we’re long and strong, unless we take out last week’s lows. If we roll over, we’ll get out”. Then the lows get taken out just before reversing higher to make fresh highs. Those disciplined longs are now out of this market and watching it rip without them.

Then towards the top of the range, you have the bears saying, “okay, we’re short right here and we’ll cover if we make new highs”. Then, of course, the market makes new highs, taking out the stops and then reverses lower to make fresh lows. The bears are now watching the market get crushed without them.

At this point, the bulls are frustrated. The bears are frustrated. And everyone who did nothing is still a genius. Then the same thing happens again with the longs against the new pivot lows. And the same thing happens again with the shorts against recent pivot highs.

It’s a ridiculous cycle that is definitely amusing to watch. But at the end of the day, the increase in volatility is a sign of a turning point. And therefore, since we’ve rallied into this particular broadening formation, a reversal here would signal lower prices for the Dow Industrials.

I’d say a breakdown below last week’s lows would confirm, but then I would just be another silly trader that we just had some fun with up above.

*One more thing to note is the bearish divergence in RSI down at the bottom of the chart. Fresh highs Monday morning for the Dow Jones Industrial Average (imagine that), but lower highs clearly in the Relative Strength Index.

Careful out there…