Classic Diamond formations are unusual but not rare. They are normally created by a large head & shoulders formation that develops over time. These are strong indicators of a major change in market trend and when formed cannot be dismissed. Activity in the Dow invites us to examine one such potential formation.

(Weekly chart of Dow)

We can see where a small head & shoulders formation occurred from April to September in 1999. Conservative technicians estimate the potential downside move from the price distance between the shoulders and neckline. In this case that was roughly 500 points.

The neckline was penetrated in September of 1999 and retested in early October. In classic form the rally failed and it's subsequent drop covered 500 points as expected to a bottom in mid-October 1999.

A sustained rally from there led the index to it's all-time highs near 11,800 in January 2000. It appears that the market has been in creation of another much larger head & shoulders pattern. This one spans from April 1999 to at least June 2000 overall. We can see the distinct formation take shape during this timeframe.

Again, conservative technicians would estimate the potential downside move by the distance from top of shoulder to neckline or in this case, 1,000 points. That would be a return to levels tested earlier in the year where support may be found.

(Weekly chart of Dow)

Such a large, long-evolving pattern creates a classic "Diamond formation". Subsequent lower highs and higher lows coil the market into the narrow point of a diamond-shaped wedge.

In this case technicians target the potential move by a measure of distance at the widest part of the wedge. A total of 2,000 points on the Dow may be the eventual price target reached. The breakout could go either way but this is a strong bearish formation and favors the downside.

As with all technical studies, Diamond Formations are not an exact science but merely one powerful tool of market forecast. It may seem difficult to imagine such extreme moves upon release and that assumption is fair. However, technical study dictates the removal of bias and emotion in order to analyze price action objectively.

Time will certainly tell which direction the market shall choose while we remain astute of all conditions that exist. Knowing future price-action potential based on strong pattern formations today provide us an edge to outperform the market as changes inevitably occur.