Dow Jones (DJIA) Index Chart Pattern - May 08, '09

Last week's analysis of the Dow Jones (DJIA) index chart pattern was concluded with the following observation:-

"The Dow Jones (DJIA) index chart pattern seems to be making up its mind which way it wants to go. The index should have corrected by now. But the plethora of bad news from the economy is being ignored. This could lead to another effort at moving up - which will face strong resistance from the 200 day EMA at around the 9000 level."

The index did move up to the 8600 level, but fell short of the 200 day EMA, which is still moving down. A look at the 3 months bar chart pattern of the Dow Jones index will reveal some contra indications to the up move:-

(Please right-click on the image; open it in a new tab or window for a better view.)

Thursday's (May 7, '09) trade was a 'reversal day' - a higher high and lower close - on higher volumes. This is bearish and indicates a correction in the offing. For the fourth time during this 2 months rally, a 'reversal day' was ignored by the market. Friday's close was higher, but on lower volumes. This smells of a rally that is being 'engineered'.

The slow stochastic has re-entered the overbought zone; the MACD has made a new high; the ROC has moved up but made a lower high; the RSI has started moving down after making a lower high.

I'm neither a conspiracy theorist nor a die-hard bear. Nothing would please me more than the start of a new bull phase. But this rally looks like a desperate effort to reverse a long bear market into a feel-good bull market.

The DJIA can't keep moving up without a serious correction. A sustainable up move requires it. So for the bulls' sake, we need one quickly. Otherwise, the eventual drop may be precipitous.

Bottomline? Investors on the side lines need not feel left out. The chances for entering this market at lower levels will come soon enough. Existing investors may do well to take some profits off the table.