Dow Jones (DJIA) Index Chart Pattern - Feb 26, '10

Last week, the chart pattern of the Dow Jones (DJIA) index had shown a decent rally by the bulls that took the index above both the 20 day and 50 day EMAs. The receding volumes were not convincing and I had made the following observations:

'Expect the bears to put up some resistance around the 10500-10550 area (several tops in late Nov and early Dec '09). Though the 25 basis points discount rate hike by the Fed was taken in its stride by the Dow, things aren't getting better in the economy.'

The economic recovery does not really warrant the kind of bullishness exhibited by the Dow for nearly a year now. Sales of previously owned homes - which comprises 90% of transactions in the US - fell by 7.2% in Jan '10 to its lowest level in 7 months. Sales of newly built homes dropped by 11% in Jan '10.

A look at the 3 months bar chart pattern of the Dow Jones (DJIA) index shows that the recovery by the bulls got stalled below the 10500 level, as expected:-

The index made a high for the week at 10469 on Monday, Feb 22 '10. That was all the strength that the bulls could muster. After closing exactly on the 50 day EMA on Tuesday, the index managed to close above the 50 day EMA for the rest of the week, but failed to close above the 10400 level even for a single day.

The technical indicators are looking a little more bullish than the previous week. But looks can be deceiving. Note the volume bars. The down days on Tuesday and Thursday had the highest volumes during the week. That goes against the logic of a bull rally.

The slow stochastic is at the edge of the overbought zone with the %K merging with the %D. Both the RSI and MFI have moved above their 50% levels. The MACD has turned marginally positive after spending a month in the negative zone.

The bulls are likely to make another attempt to push the index above the 10500 level, but their real hurdle will be the Jan 14 '10 top of 10767. As long as the 200 day EMA keeps rising and the Dow remains above it, the bulls will hold sway.

Bottomline? The Dow Jones (DJIA) index chart pattern is still struggling to extricate itself from a strong bear grip. Some more sideways consolidation may be in the offing before a clearer trend emerges. Continued caution is advised. Buy only undervalued stocks - if you can find them.