Dow Jones (DJIA) Index Chart Pattern - Jun 11, '10

The chart pattern of the Dow Jones (DJIA) index is showing some technical strength that can lead to a short-term upside though the bears are not ready to give up control yet. In last week's analysis, I had made the following observation:

'None of the technical indicators made new lows - a positive divergence. Bulls may try to clutch at this straw.'

The Dow's trading action on Tue. Jun 8 '10 formed a typical 'reversal day' pattern - an intra-day low of 9726 that was 70 points lower than the previous day's low and a 120 points higher close of 9940 on the highest volumes of the week.

No wonder the bulls pounced on the opportunity to start a short-term rally from Wed. Jun 9 '10, which took the index up to the level of the entangled 20 day and 200 day EMAs. Predictably, the strong resistance of the combined hurdle halted the rally for the week.

Will the bulls be able to continue with their new found enthusiasm or will the bears stop them on their tracks? A close look at the 6 months bar chart pattern of the Dow Jones (DJIA) index may reveal some clues:

Note that the week's low of 9726 was lower than the previous week's low of 9881 and the week's close of 10211 was almost 280 points higher than the previous week's close. That made a 'reversal week' pattern, which should provide a boost to the short-term rally.

The technical indicators are supporting the prognosis. The slow stochastic has moved up sharply from the oversold zone. The MACD is above the signal line and rising in negative territory. The MFI is just below its 50% level. The RSI has edged above its 50% level, and showing clear positive divergence - a higher bottom and a higher top while the Dow made a lower bottom and lower top.

The dire predictions of a fragmentation of the Euro-zone and its currency was overdone. The central banks are implementing austerity measures and providing monetary support to ensure that sovereign debt defaults are avoided. The economies are far away from real recovery but a collapse of the financial system is unlikely.

What came as a positive surprise was the news of China's huge improvement in export earnings. Consumer sentiment seems to be improving - though it remains to be seen whether sentiments lead to actual purchases.

Bottomline? The chart pattern of the Dow Jones (DJIA) index is hinting at a short-term reversal of the down trend. This isn't a time to be ultra bullish. Selective buying, topping up of existing portfolios and getting rid of junk during a rally should be on the investors' to-do lists.