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Monday, June 15, 2009

Dow Jones (DJIA) Index Chart Pattern - Jun 12, '09

In last week's discussion about the Dow Jones (DJIA) index chart pattern, the following comment was made:-

'While the Dow has been making higher tops, the ROC and RSI have been making lower tops. This negative divergence, coupled with disappearing volumes, do not augur well for the index to continue its rally much longer.'

A look at the 3 months bar chart pattern of the Dow Jones (DJIA) index will reveal that the rally has definitely stalled:-

Dow_Jun1209

In 5 days of trading last week, the 200 day EMA was penetrated 4 days in a row. Except on Friday, Jun 12, '09 when the Dow closed bang on the long-term average, all the daily closes were below the 200 day EMA.

This strong resistance from the long-term average means the DJIA index is yet to enter a bull market. Both the 20 day and 50 day EMAs are still rising but are below the 200 day EMA. The volumes are low, which does not instill confidence about continuation of the rally.

The technical indicators are not looking bad. The slow stochastic is marginally overbought. The MACD is positive and above its signal line. The ROC and RSI are moving up but haven't yet made a higher top.

Today (Jun 15, '09), the Dow has opened with a gap down and is seeking support from the 20 day EMA. The short-term average has been a pillar of support ever since the rally began in early Mar '09. Watch this average, as a downward penetration may signal a strong correction.

Unemployment is still rising, albeit at a slower rate. The extra liquidity injection into the financial system has temporarily arrested the steep fall in the economy. The stock markets have celebrated the reprieve from the edge of a precipice and started an unprecedented rally. Looks like it is time to revert back to reality.

Bottomline? The failure of the Dow Jones (DJIA) index to close above its 200 day EMA, despite several attempts, is significant. Be very cautious and keep booking partial profits.

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