Dow Jones (DJIA) Index Chart Pattern – Sep 03, '10

The Dow Jones (DJIA) index chart pattern pulled off a ‘Houdini act’ by escaping from the clutches of the bears last week. May be it was the better than expected jobs report. Or, a bit of end-of-the-month short covering. Or, some spirited buying by bulls near a long-term support level.

Whatever be the reason, the Dow has received a (temporary?) respite from technically falling into a bear market. The 50 day EMA merged with the 200 day EMA but did not fall below the long-term moving average. The index closed almost 300 points higher on a weekly basis, and moved above all three EMAs.

Should the bulls celebrate their success during the Labor Day break? Not if they pay attention to some expert-speak:

“Compared to six months ago when the probability of double dip was very low, right now, I expect it to be very high,” Roubini warned.

Krugman wrote in his NY Times blog post titled ‘Delusions of Recovery’: “It’s all downhill from here.” 

Let us see if the 3 months bar chart pattern of the Dow Jones (DJIA) index is showing any effects of the weakening US economy:

The 20 day EMA is below the entangled 50 day and 200 day EMAs. The short-term moving average needs to move above the 50 day and 200 day EMAs for the bulls to escape from the bear grip. That can happen if the rally continues during this week.

Note how the volumes waned as the Dow moved above the long-term moving average. Bull rallies need volume support to sustain. The technical indicators are supporting the bulls.

The slow stochastic jumped up sharply from the oversold zone and moved above the 50% level. The MACD is still negative but is now above the signal line. The ROC has moved up from negative territory to the ‘0’ line. The RSI rose from the oversold zone to its 50% level.

The Aug ‘10 top of 10756 will be the next hurdle that the bulls have to cross. If they manage to do so, a bullish pattern of ‘higher tops and higher bottoms’ will be established. The Apr ‘10 top of 11309 remains the major barrier to the bull market.

Bottomline? The chart pattern of the Dow Jones (DJIA) index managed to avert a capitulation to the bears. But a weak economy is not conducive to unbridled bullishness. Partial profit booking and a shift to defensive stocks may be a prudent move.