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Monday, August 10, 2009

Dow Jones (DJIA) Index Chart Pattern - Aug 07, '09

There were a couple of concerns about the Dow Jones (DJIA) index chart pattern last week. One was the up move on low volumes. The other was the likely resistance from the 38.2% Fibonacci retracement level (around 9450) of the entire bear market fall.

The first concern was short-lived, as the Dow trundled upwards on better volumes. Expectedly, the 9450 level is providing resistance. The index made a brief foray to 9467 last Friday, Aug 7 '09 on an intra-day basis, but made a quick retreat.

The 3 months bar chart pattern of the Dow Jones (DJIA) index is showing a different set of concerns - this time due to the negative divergences from some of the technical indicators:-

Dow_Aug1009

Dow's vigorous rise has brought the 50 day EMA within touching distance of the 200 day EMA, and barring extraordinary circumstances, it should go above the longer term average this week. The 200 day EMA is just about starting to move up. If the 9450 level is cleared convincingly, the bull rally can continue.

The RSI is still in the overbought zone, though it has started moving down. The MFI is treading water midway between the 50% level and the overbought zone. The MACD is positive and above the signal line, but has stopped moving up. Only the slow stochastic remains comfortably in the overbought zone.

The index may take a breather before deciding on its next course of action. This is also the time of year when fund managers and analysts in Europe and the USA like to take a vacation. Could it be that they are booking profits in China and India in preparation?

Here are a couple of one year closing charts, comparing the BSE Sensex index with the Dow and the FTSE:-

Dow vs Sensex_Aug0709 

FTSE vs Sensex_Aug0709

Note how the Dow and the FTSE outperformed the Sensex in percentage terms from Oct '08 till Mar '09. That was the period when the FIIs (Foreign Institutional Investors) were selling big in the Indian stock market.

From May '09 onwards, the picture changed dramatically, with the Sensex outperforming both the Dow and the FTSE. Guess what? The FIIs were pouring money into the Indian market.

Last week's dip in the BSE Sensex index was again mainly due to heavy selling by the FIIs. Meanwhile, both the Dow and FTSE advanced on renewed volumes. Call it profit booking, or manipulation. The fact remains that the FIIs are making the world indices dance to their tune.

Bottomline? The Dow Jones (DJIA) index chart pattern is showing some hesitation at the 38.2% Fibonacci retracement level. Could it be a pause before a fall? Wish I knew. But forewarned is forearmed. Stay nimble. (Incidentally, the BSE Sensex has corrected 6% from its 61.8% Fibonacci retracement level.)

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