Monday, May 31, 2010

Dow Jones (DJIA) Index Chart Pattern - May 28, '10


The Dow Jones (DJIA) index chart pattern lost nearly 8% in the month of May '10 - its worst performance in May since 1962! From the Apr 26 '10 intra-day peak of 11309 to the May 25 '10 intra-day low of 9756, the Dow has lost more than 1500 points (13.7%) in one month.

Does that put the Dow in a bear market? Not yet. A 20% correction technically qualifies as a bear market. At Friday's close of 10137, the Dow is more than a 1000 points away. Another factor favouring the bulls is that the close of 9974 on May 26 '10 was higher than the Feb 8 '10 close of 9908. So much for the good news.

Now the bad news. The May 25 '10 intra-day low of 9756 went below the May 6 '10 'fat finger' crash low of 9787 (which was lower than the Feb 5 '10 intra-day low of 9822). That is the lowest point that the Dow has reached since moving up after touching 9647 on Nov 2 '09 almost 7 months back.

Is the correction over, or will the Dow fall more, and into a bear market? That is a million dollar question. Let us consider the possibilities.

The pullback in the earlier part of the month faced resistance from the falling 50 day and 20 day EMAs and dropped steeply below the 200 day EMA. Subsequent efforts by the bulls at pullbacks have been resisted by the 200 day EMA.

The 20 day EMA is well below the 50 day EMA, and both moving averages are dropping down. A bear market will get confirmed when first the 20 day EMA and then the 50 day EMA cross below the 200 day EMA.

The technical indicators are looking less bearish. The slow stochastic and the MFI bounced off their oversold zones. The MACD has started to rise in negative territory but is still below the signal line. The RSI has moved up towards the 50% level.

Will the bulls recharge their batteries during the long Memorial Day holiday weekend and launch another pullback effort next week? Possibly, but the bears seem to be pressing sales at every rise in the Dow. In case the Dow manages to move above the 200 day EMA, resistance can be expected from the falling 20 day and 50 day EMAs.

The economic news from Europe is still grim, with Fitch downgrading Spain's sovereign debt rating. Spain's GDP is almost 5 times greater than Greece's or Portugal's. Any further adverse news could cause another round of global selling.

The PIIGS are caught between a rock and a hard place. Their profligacy in borrowing has caused the current problems. Any austerity measures adopted to improve their finances would lead to slower economic growth - which the markets will not like.

The US economy is like the proverbial monkey trying to clamber up a greased pole. Government stimulus has created new jobs. But continued lay-offs in the private sector has reduced the total additions. Consumer confidence is increasing, but where is the money to buy? No wonder unsold homes are increasing and home prices are decreasing.

Even if a double-dip recession appears remote, the economy will require a much longer period to get back on track. The 14 months long bull rally was overdone, and it is time to pay the piper.

Bottomline? The chart pattern of the Dow Jones (DJIA) index shows that all attempts by the bulls at pullbacks are being used as selling opportunities by the bears - a sign of weakness. Stay on the sidelines, but start preparing your 'buy' lists for Mr Market's forthcoming summer sale.

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