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Monday, January 25, 2010

Dow Jones (DJIA) Index Chart Pattern - Jan 22, '10

It was almost like a bolt from the blue. The Dow Jones (DJIA) index chart pattern was moving up merrily, ignoring all concerns about weak fundamentals and low volumes.

The index not only tested the previous high of 10767 on the first day of a holiday-shortened week, but closed at 10725 - the highest close in 15 months (since Oct 1, '08).

The complacency of the bulls may have brought about the sudden and vicious bear attack. In three days, the index lost more than 600 points on strong volumes.

The much-awaited correction seems to be unfolding at last. The Dow has dropped below the 50 day EMA for the first time in more than 6 months. Friday's low of 10133 is below the Dec '09 low of 10207.

Let us look at the 6 months bar chart pattern of the Dow Jones (DJIA) index to check the likely supports to a further fall:-


The low made on Nov 2, '09 was 9647. That is a bit below where the rising 200 EMA has reached currently. We can expect support in the 9600-9700 zone, should the correction continue. There are good supports in the 9000-9500 zone as well.

The technical indicators are hinting that the bulls may find it difficult to get out of the bear grip that easily. The ROC has plunged into the negative zone. The RSI is below the 50% level and falling. Likewise for the slow stochastic. The MFI is just above the 50% level, but is ready to drop below.

Note the negative divergences in the ROC, RSI and slow stochastic - all of which failed to make new highs with the index. Will the bulls quickly engineer a pull back, as they have done several times during this rally? It won't be surprising if they do.

Bottomline? The Dow Jones (DJIA) index chart pattern is facing a determined bear attack. Wait and watch for the correction to play out. It may not be prudent to start buying right away.

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