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Monday, July 5, 2010

Dow Jones (DJIA) Index Chart Pattern - Jul 02, '10

The chart pattern of the Dow Jones (DJIA) index is becoming more bearish with each passing day. I had mentioned about a possible upward bounce last week, as the index had closed near a long-term support level. No such thing happened.

Technically, a 20% drop from the Apr '10 top of 11309 (i.e. to 9047) will confirm a bear market. The other indicator confirming a bear market is what is called the 'death cross' - when the 50 day EMA drops below the 200 day EMA.

Both of these technical confirmations are still awaited. But one look at the 1 year bar chart pattern of the Dow Jones (DJIA) index will leave no doubts that the index is back in a bear market:


The Dow has made a head-and-shoulders bearish pattern - with the left shoulder at the Jan '10 top, the head at the Apr '10 top, the right shoulder at the Jun '10 top and the neck line passing through the bottoms made in Feb '10 (9823) and May '10 (9756).

Head-and-shoulders patterns are fairly reliable at indicating trend reversals, and also provide price targets. For ease of calculation, let us assume that the head is at 11300 and the neck line at 9800. The down side target is calculated as follows:

Head to neck line distance = 11300 - 9800 = 1500; target below neck line = 9800 - 1500 = 8300.

The index closed last week at 9686. That means it has penetrated the neck line, but the 3% 'whipsaw' lee-way means the downward break will get confirmed once the Dow falls below 9500.

We can also use Fibonacci retracement levels to calculate down side targets. The rise from the Mar '09 low of 6531 to the Apr '10 peak of 11309 was of 4778 points. A 38.2% Fibonacci retracement gives a target of 9484. A 50% retracement gives a target of 8920. A 61.8% retracement gives a target of 8356.

Note that market players are aware of these levels and bulls are likely to defend them. That means upward bounces are quite likely from the 9500, 8900 and 8300 levels. Bears will use such bounces to press sales.

The technical indicators are all bearish. The 50 day EMA is still above the 200 day EMA, but the 'death cross' is imminent. The slow stochastic is in the oversold zone. The MACD is below the signal line, and falling in negative territory. The RSI is about to drop into the oversold zone.

Note that the RSI peaked in Mar '10 - more than a month before the Dow peak in Apr '10 - and after remaining in the overbought zone for several trading sessions, started falling. The negative divergence was an advance warning of the correction to follow.

Bottomline? The chart pattern of the Dow Jones (DJIA) index is making lower tops and bottoms, and is well below the 200 day EMA. It is likely to enter a technically confirmed bear market soon. This is not the time to buy the dips, but to sell on rises. Patient investors should wait for lower entry points.

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