Dow Jones (DJIA) Index Chart Pattern - Feb 12, '10

Last week, I had made a couple of observations about the Dow Jones (DJIA) index chart pattern.

1. 'It is interesting how this round figure has become the battleground for the bulls and bears. The lows on Thursday and Friday pierced the 10000 level, but on both days the Dow managed to close marginally above.'

2. 'Should the bulls throw in the towel? Not yet. Friday's price action on high volume looks like a 'reversal day' (lower low but a higher close). That could lead to another attempt at a pull back.'

The 10000 level continued to remain the battle line for the bulls and bears. On Monday, Feb 8 '10, the index closed at 9908 - its first closing below the 10000 mark in over 3 months.

The bulls immediately fought back and the Dow closed above the 10000 level on the next four days - touching a high of 10185 on Thursday, where it met resistance from the falling 20 day EMA.

The 3 months bar chart pattern of the Dow Jones (DJIA) index shows the valiant effort by the bulls to extricate themselves from the tight bear hug:-

The 200 day EMA is rising - albeit much more slowly than earlier - and the index remains above it. That means the bulls are well entrenched to fight another day. But declining volumes during an upward rally isn't encouraging.

The technical indicators have improved a little. The slow stochastic has moved out of the oversold zone but remains below the 50% level. The MACD is still negative but touching the signal line. The RSI bounced off smartly from the oversold zone and is at the 50% level. The MFI is just below the 50% level.

The Dow has closed below the 50 day EMA three weeks in a row. That hadn't happened since the rally began in Mar '09. The odds will be in favour of the bears till the Dow moves convincingly above the medium-term moving average.

Bottomline? The Dow Jones (DJIA) index chart pattern is in the midst of a decent correction. Bulls don't need to panic yet. Technically, the 10000 level has not been broken on the downside. Investors should stay on the sidelines till a clearer trend emerges - a move above the 50 day EMA or below the 9700 level.