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Monday, July 20, 2009

Dow Jones (DJIA) Index Chart Pattern - Jul 17, '09

What a difference in the chart pattern of the Dow Jones (DJIA) index in a week! Just when it looked like the bulls were on the mat and about to be counted out, they miraculously jumped up and started pulverising the bears with renewed verve. It was straight out of a WWF show!

In last week's discussion, I wrote about the following possibility:

'Bulls will try to find some comfort from the RSI and MFI, which are below the 50% levels, but still not in oversold zones. They may try to inject some life back into the index, which will be an opportunity to book profits.'


The Dow got rejuvenated and ended up with two successive closes above its 200 day EMA. The 20 day EMA bounced off the 50 day EMA and both averages have started to move up again. The short and medium term averages are quite a bit below the longer term one. Till they move above the 200 day EMA, the index will technically remain in a bear market.

The MACD has moved above its signal line and entered positive territory. The slow stochastic has leaped up from the oversold zone and is now poised below the overbought zone. The RSI and MFI have moved above the 50% levels. The technical indicators are now pointing to a continuation of the up move in the shorter term.

Seems like the bears got trapped badly last week. Why? Look at the volumes. They were significantly higher during the up move in April and May '09. Last week's volumes barely equalled the lower volumes during the June '09 index slide. I reckon it was short covering that pulled the DJIA up.

Look closely at the RSI and MFI. The former had dipped slightly and the latter flattened as the Dow closed higher. These negative divergences may limit the rise of the index.

The buying was probably the effect of news about profits declared by Goldman Sachs and JP Morgan. I'm not sure how much of the profits came from normal banking operations and how much got generated by treasury activities.

Even Paul Krugman wasn't particularly impressed with the GSachs activities - as he wrote in this article.

Bottomline? The Dow Jones (DJIA) index chart pattern reveals another attempt to enter a bull market. Will the bulls flatter to deceive, again? Savvy investors should use the opportunity to take profits off the table.


Sujatha said...

Good chart and it clearly shows that u r following only technicals, not news etc. , as a experienced person...

But novice like me are not able to digest this upmove cos as we think still v r in bear market...and it may fall any time, and loosing profit or sitting on the fence and watching...

Can u sum up in simple language in your post what's Vivek'jis weekly prediction says...(able to understand something) but would like to hear from you..

Thanks in adance.

Subhankar said...

Thanks, Sujatha.

Indices and stocks do get swayed by news. I have commented on news about Goldman Sachs and JP Morgan results. I'm not a great believer of the 'efficient market' theory that hypothesises that all news and events are already reflected in the prices or index levels.

Please don't try to out-think or predict the market. Follow basic investment principles in selecting stocks for your portfolio. You'll find several articles in this blog about sector and stock selection.

Every analyst has a thought process based on experience. Vivek writes about several different alternatives, and unless you have some exposure to technical analysis and Elliott Wave theory, it can seem complicated and confusing. If you have a specific query, you should write to him directly.

Sujatha said...

Quote : "Please don't try to out-think or predict the market"

Good lines...will strongly registered in my mind and observe the price behaviour.. in future..

In EW analysis i know only the very basic.. trying to grasp... but not concentrating much on that cos of time constraint and confusing...want to trade as much as simple way..

Thanks for your reply