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Monday, March 22, 2010

Dow Jones (DJIA) Index Chart Pattern - Mar 19, '10

In last week's analysis of the Dow Jones (DJIA) index chart pattern I had expected the bulls to try and extend the rally to test and surmount the Jan '10 high of 10767. The bulls did exactly that.

On the last three days of the week, the index moved above the 10767 mark, making new highs each day. But only on Thursday did it manage a close at 10779. Friday's trading created a reversal day pattern - a higher high but a lower close at 10742, on the highest volumes of the week.

Technically, this is a sign of buying exhaustion and could lead to a period of consolidation or a correction. The 10767 level has not been crossed convincingly yet, and bears have little option but to grab at that straw.

The 6 months bar chart pattern of the Dow Jones (DJIA) index shows that the bulls are well in control - whatever be the state of the economic recovery:-

Dow_Mar1910

All three EMAs are moving up with the index well above them. The slow stochastic has remained inside the overbought zone for three weeks. The MACD is rising in the positive zone and is above the signal line. But it failed to reach the Nov '09 high while the Dow made a new high - a negative divergence.

The RSI is well above the 80% level and is looking overbought. The last few times it touched the overbought zone and reacted down almost immediately. The MFI is also in the overbought zone, but trying to drop down.

There are other indications of a pause or even a reversal of the rally, because a surge in put or sell options in New York and a decline in call or buy options is a classic signal of a stock market trend reversal.

The economic recovery remains weak. Unemployment claims declined for the week while continuing claims expanded, signaling that layoffs are leveling off but that hiring or recalls have not begun in earnest.

Bottomline? The Dow Jones (DJIA) index chart pattern seems to be hesitating near its previous top, and a possible correction or a period of consolidation may be in the offing. Stay invested with strict trailing stop-losses.

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