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Monday, September 7, 2009

Dow Jones (DJIA) Index Chart Pattern - Sep 4, '09

Last week's analysis of the Dow Jones (DJIA) index chart pattern had a few concerns, in spite of the overall bullish undertone of the stock market. The biggest concern remains the bearish 'rising wedge' pattern in the weekly chart of the Dow.

The economy continues to get 'less bad' and that is being considered as good. The Q2 earnings beat the revised and much lower estimates, but it did beat them. The doom and gloom surrounding a repeat of the 1929-like recession is dissipating slowly. While government spending is increasing, tax collections are decreasing.

High speed algorithmic trading has generated the 'feel-good' higher volumes and the large banks have traded their way into profits. Consumer spending hasn't quite picked up to the level where every one can breathe a sigh of relief. There is still talk of a double-dip recession.

Such a conflicting fundamental backdrop led to a mild correction in the Dow, but by the end of the week, the index had picked itself up by its bootlaces and finished only 1% lower week-on-week. Let us have a look at the 3 months bar chart pattern of the Dow Jones (DJIA) index:-

Dow_Sep409

Despite three consecutive closes below the 20 day EMA, the first time that had happened since the middle of Jul '09, the bull rally remained intact with all the three EMAs moving up.

A look at the volume bars paints a completely different picture. Big volume on a down Tuesday and almost 50% lower volume on an up Friday. Without volume support, how long will the bull rally last? For the bulls' sake, let us hope that the index is not forming the right shoulder of a bearish 'head-and-shoulder' formation.

The technical indicators have turned weaker - not entirely unexpected on a down week of trading. The RSI is at its 50% level after slipping below. The MFI is back where it was the week before. The slow stochastic dropped to the 50% level and is attempting to move up. The MACD is still positive, but is falling and has gone below the signal line.

Bottomline? The chart pattern of the Dow Jones (DJIA) index may be getting ready for a bigger correction. Strong up moves in the stock markets of Asia and Europe may not have the desired bullish effect because of the Labor Day holiday. Remain invested, but be prepared. A 'rising wedge' is a bad omen for bulls.

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