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Monday, August 16, 2010

Dow Jones (DJIA) Index Chart Pattern – Aug 13, '10

The Dow Jones (DJIA) index chart pattern was looking bullish last week, but dwindling volumes leading to a negative divergence in the MFI, and a ‘rising wedge’ pattern kept bearish hopes alive.

The inability of the Dow to convincingly move above the 10655 level (61.8% Fibonacci retracement level of the recent correction from the Apr ‘10 top of 11309 to the Jul ‘10 bottom of 9596) provided the bears with the impetus to launch a strong counter attack.

On Mon. Aug 9 ‘10, the index touched an intra-day high of 10756 and closed at 10699 – its highest close since May 13 ‘10 – on the lowest volumes of the week. The bears struck the next day, and the index tumbled down from the rising wedge pattern, and below the 20 day and 50 day EMAs, on increasing volumes.

The Dow lost 350 points (3.3%) on a weekly basis. The 200 day EMA saved the Dow from lapsing into a bear market, but the reprieve may be temporary. The 3 months bar chart pattern of the Dow Jones (DJIA) index shows that the bears are note done yet:

Dow_Aug1310 

Both the 20 day and 50 day EMAs have changed directions, though they are still above the flat 200 day EMA. The slow stochastic, RSI and MFI have all dropped below their 50% levels. The MACD is still positive, but is below the signal line and falling.

Is this going to be a temporary 4-5 days correction, or is it the harbinger of a bigger fall? Apparently, a technical pattern called ‘Hindenburg Omen’ has formed. Since 1985, every crash in the NYSE has been preceded by this dreadful omen – as per this article.

The fundamental news continue to be mixed. Retail sales in July rose 0.4%. The CPI rose 0.3%, its first rise in 4 months. Before bulls get too excited, they should read this WSJ article. Rent data make up nearly a third of the CPI. As house prices have plummeted, house rents have increased as more people walk out of mortgages to rent homes instead. If rent data is excluded, CPI may turn negative.

Bottomline? The chart pattern of the Dow Jones (DJIA) index has quickly turned from bullish to bearish in a week. If the 200 day EMA is unable to support the index, bear market strategy – sell on rises – should apply. Put your ‘buy’ list away for now.

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