Monday, May 10, 2010

Dow Jones (DJIA) Index Chart Pattern - May 7, '10

The chart pattern of the Dow Jones (DJIA) index spent a violently volatile week - just the kind of index gyrations that scare the wits out of small investors and make them press the panic button.

So what really happened on Thursday? What caused the sudden 1000 point drop? Every one has an explanation. Algorithmic trading gone haywire. Glitch in the system. A fat finger punched a wrong key. Panic selling by investors.

Of all the attempted explanations, the most entertaining one was this story. In the old days, when they sent a program trading order to sell a basket of stocks, the old dot-matrix printer behind them would loudly whir to life and print up a confirmation that the basket went. One day, trying to sell a basket, they got no confirmation. Silence. So they hit the button again. And again... and again... Until finally someone shouted - "THE PRINTER IS OUT OF PAPER," as they watched the market fall under the cascade of sell orders that had just been sent.

The sudden fall should not have come as a great surprise - though the extent of the huge fall within a few minutes was surprising. I have been warning about negative divergences in the technical indicators, and high-volume sell-off days that indicated distribution.

Let us have a look at the 6 months bar chart pattern of the Dow Jones (DJIA) index to check whether the worst of the selling is over or if there is more down side in the offing:


The most important point to observe is that two high-volume down days (Thursday and Friday) could not push the index to close below the 200 day EMA, even though on an intra-day basis it pierced the long-term moving average and breached the Feb '10 low.

Technically, the bull market remains in tact. The Dow needs to close convincingly below the 200 day EMA and the Feb '10 lows to confirm a change of trend. But this was a strong warning to curb the bullish mood.

With global indices on a pull back mode today, the Dow can be expected to follow suit. Any up move is likely to face resistance from the falling 50 day and 20 day EMAs, and can be used to book profits.

The slow stochastic and the RSI are both below their 50% levels. The MFI is resting at the 50% level. The MACD has turned negative. Note that the RSI and MFI has been making lower tops and bottoms since mid-March '10 as the Dow went on to make new highs.

Bottomline? The chart pattern of the Dow Jones index is indicating that the long bull rally is coming to an end. The tremors caused by the Eurozone sovereign debt problems may be strong enough to bring down an economy propped up with printed money. Conserve cash and stay on the wings. 

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