Monday, June 7, 2010

Dow Jones (DJIA) Index Chart Pattern - Jun 04, '10

In last week's analysis of the Dow Jones (DJIA) index chart pattern, the technical indicators had hinted that the bulls may launch another pullback after the long Memorial Day weekend.

The bears have been pressing sales at every rise of late - a sign of a bear market - which led me to comment:

'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.'

After failing to get past the 200 day EMA on the first two days of a holiday-shortened week, the Dow moved up smartly on Thursday, Jun 3 '10 and reached the falling 20 day EMA on an intra-day basis. Strong resistance by the bears saw the index drop down to the 200 day EMA.

The bottom fell out on Friday after a spate of bad news. The possibility of a sovereign default in Hungary sent the euro on a dive against the dollar. The employment data revealed that the bulk of new jobs were for temporary census workers. With 7 million people unemployed for more than 6 months, the economic recovery will be slow and painful.

Private sector job additions were way below consensus estimates and April's encouraging figure. A New York Times article about a 43 year old engineer in Chicago accepting a temporary census worker's job after several months of unemployment highlighted the woeful state of the economy.

The 3 months closing chart pattern of the Dow Jones (DJIA) index leaves little doubt that the US stock market is sliding into bear country:


Friday's close of 9932 was just above the Feb 8 '10 close of 9908. But the difference is that the Feb '10 low was above the 200 day EMA. Any hope of a quick recovery by the bulls - like they managed to engineer in Feb '10 - will be stifled by the bears.

The slow stochastic and the RSI are both below their 50% levels. The MACD moved up in negative territory and is touching the signal line. The ROC remains negative and is dropping. None of the technical indicators made new lows - a positive divergence. Bulls may try to clutch at this straw.

Technically, the confirmation of the bear market has to wait till the 20 day and 50 day EMAs drop below the 200 day EMA. It seems like a question of 'when' and not 'if'. The longer the Dow spends below the 200 day EMA, the less the chance of a revival of the bull market.

Bottomline? The chart pattern of the Dow Jones (DJIA) index shows the formidable resistance from the 200 day EMA to all attempts at  pullbacks. Looks like it will be a summer of discontent for the bulls. The fundamentals are too weak for robust economic growth. Patient investors will be rewarded with lower stock prices.

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