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Monday, May 24, 2010

Stock Index Chart Patterns - Dow Jones (DJIA) and Bovespa (Brazil), May 21, '10

Dow Jones (DJIA) index chart


In last week's analysis of the Dow Jones (DJIA) index chart pattern, I had observed a 'reversal day' followed by a 'distribution day', and concluded that the bulls didn't have much hope (of a recovery) in the near term.

An effort at a pullback on Tuesday, Mar 18 '10 was nipped in the bud by the falling 20 day and 50 day EMA, which had merged briefly. The bears attacked with renewed vigour on increasing volumes on Wednesday and Thursday, and pushed the Dow below the 200 day EMA.

Friday's intra-day low of 9861 was less than 100 points above the May 6 '10 ('fat finger' crash day) low of 9787. A sharp pullback on reduced volumes stopped short of the 200 day EMA but ensured that the Dow remained above the psychological 10000 level. Note that the 20 day EMA has dropped below the 50 day EMA but it is still 400 points above the 200 day EMA.

Bulls may try to stem the rot by grasping at these straws. The technical indicators are signalling that any rallies may be short-lived and used as a selling opportunity. The slow stochastic and RSI are both below their 50% levels and moving down. The MACD is below the signal line and falling quickly in negative territory. The MFI had a small bounce off the oversold zone.

The bulls are getting weaker with each passing day after a heady 13 months long rally. Indicators of economic activity like Copper prices, Baltic Dry Shipping index, Dow Jones Transportation index are all hovering near or below their 200 day Moving Averages. That means the economic recovery may be a chimera.

Bovespa (Brazil) index chart


The Brazil Bovespa index chart pattern was a picture of bullishness back in Jan '10. The index had just made a new high of 71068, even as the MACD, RSI and MFI were all indicating negative divergence.

The index corrected by more than 9700 points (13.5%), fell to a low of 61341 in Feb '10, received support near the 200 day EMA and started a fresh rally that peaked higher at 71989 on Apr 9 '10.

Note that both the RSI and MFI made lower tops as the index rose to a new high. This time the bears attacked with much more determination. The intra-day low of Feb '10 was broken on May 6 '10, when the Bovespa fell in sympathy with the Dow - down to 60774.

Last week's high volume bear onslaught kept the index below the 200 day EMA throughout the week, with Thursday's low of 57634 a good 5% below the May 6 '10 low. Friday's sharp 2000 points pullback took the Bovespa above the psychological 60000 level - but short of the May 6 '10 low of 60774.

The technical indicators are quite bearish, in spite of Friday's big pullback. The 20 day EMA has slipped below the 200 day EMA. The slow stochastic is attempting to emerge out of the oversold zone. The MACD is sinking deeper into negative territory. The RSI is at the edge of its oversold zone. The MFI has bounced off the oversold zone.

The bulls look like a prize fighter who has taken too many punches - all glassy-eyed and wobbly-kneed - awaiting the knock-out blow.

Bottomline? The chart patterns of the Dow and Bovespa indices have entered bear markets - much like indices around the globe. Remember that money is made in bear markets by selling on rises and buying back on dips. Long-term investors can hang on to their good portfolio stocks and accumulate more on sharp falls. This is not the time for bottom-fishing.

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