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Monday, May 17, 2010

Dow Jones (DJIA) Index Chart Pattern - May 14, '10

The following comments, made in last week's analysis of the Dow Jones (DJIA) index chart pattern, may be worth repeating:

'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.'

One glance at last week's trading pattern in the 3 months closing chart of the Dow Jones (DJIA) index will reveal why I'm beating my own drum:


The sharp pullback on Monday on decent volumes took the index up to the falling 20 day EMA intra-day, but it faced resistance and fell lower to close below the 50 day EMA. On Tuesday, the pattern was repeated - resistance from the 20 day EMA intra-day followed by a close below the 50 day EMA - but on lower volumes.

On Wednesday, the Dow managed to move above the 20 day EMA and even closed a shade above the short-term moving average - on still lower volumes. That marked the end of the pullback, as there was little follow-up buying by investors.

Thursday's pattern was a typical 'reversal day' - a slightly higher high and a much lower close below the 50 day EMA, indicating that the bulls were on the ropes. Friday was a down day on much higher volumes - another 'distribution day' as the bears took charge. Bulls may be encouraged by the fact that the Dow gained 240 points on a weekly basis.

What is the road ahead? The technical indicators have started to weaken again. The MACD is below the signal line and dropping in negative territory. The slow stochastic moved above the 50% level, but seems ready to switch directions. The RSI is treading water below the 50% level. The MFI is going downhill below the 50% level.

Bulls are unlikely to give up in a hurry after such a long global rally. They will fight back periodically as long as the Dow remains above the 200 day EMA. A weakening euro currency does not augur well for growth of the global economy, as exports to the Eurozone will become more expensive.

Bottomline? The chart pattern of the Dow Jones (DJIA) index does not hold out much hope for the bulls in the near term. Get ready for a long summer where the bears are likely to dominate. Investors should take profits off the table and go for a vacation.

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