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Monday, April 26, 2010

Dow Jones (DJIA) Index Chart Pattern - Apr 23, '10

The chart pattern of the Dow Jones (DJIA) index took just a day to recover from the sell off due to the Goldman Sachs fraud news, and continued on its upward march.

The bears must be a really frustrated lot by now. All their efforts to reign in the index rise since the low of Feb '10 have come to nought. By Friday, the Dow made a new intra-day high of 11247 and a closing high of 11204. Another higher close on a weekly basis.

Is there any logic behind this relentless rally on low volumes and without any significant correction? Is it relief at the fact that a total collapse of the financial system has been averted? Is it faith in the 'system' that everything will eventually turn out fine? Are those good enough reasons to continue to buy every time the Dow dips by a percentage point?

Seasoned investors don't worry too much about such questions. The stock market tends to move on sentiment. Logic has very little effect in the equation. The high tide lifts all boats.

At some point in time, in the not so distant future, the effects of the massive economic stimulus will need to get worked out of the system. The tide will turn. There is no point in worrying about it. Instead, like boy scouts, be prepared. By being disciplined about setting trailing stop-losses.

Let us have a look at the 6 months bar chart pattern of the Dow Jones (DJIA) index:-


The Dow and the three EMAs are moving up nicely together. It is more of a slow and steady up move with frequent support from the 20 day EMA. Volumes have picked up a bit during the last couple of weeks. Note that the highest volume of the month was on the previous Friday, a down day. Last Friday's new high was made on much lower volumes.

The slow stochastic is in the overbought zone. The MACD is positive and touching the signal line, but has not been moving up. The RSI is above the 50% level and exhibiting a clear negative divergence for a month - making lower tops as the Dow moved higher. The MFI is at the edge of the overbought zone but failed to make a new high.

Eventually, the combined effect of the negative divergences and the increasing distance between the 50 day and 200 day EMAs will take its toll on the bulls. Till then, sit back and enjoy the ride - but don't forget to take some profits off the table.

Bottomline? The chart pattern of the Dow Jones (DJIA) index has once again confounded the bears. The last of the bears and the fence-sitters are likely to jump into the fray anytime. A spurt in volumes will follow. That will be the signal for a proper correction.

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