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Monday, December 13, 2010

Stock Index Chart Patterns – Dow Jones (DJIA) and FTSE 100 – Dec 10, ‘10

Dow Jones (DJIA) Index Chart

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In last week’s analysis of the Dow Jones (DJIA) index chart pattern, I had made the following comments:

“It may be a good idea to remain a little circumspect… the Dow is close to its Nov ‘10 top, and previous tops tend to provide resistance to up moves.”

On Tue. Dec 7 ‘10, the Dow touched an intra-day high of 11507 on strong volumes, testing the high of 11506 of Nov 5 ‘10. But the index could not sustain at the higher altitude, and just about managed to clear the 11400 level by the end of the week. The Nov 5 ‘10 closing level of 11444 needs to be cleared convincingly before the bulls can regain control.

With easy liquidity provided by Bernanke’s QE2, a new high on the Dow chart may be reached sooner than later. But the bears are not out of the game yet. Note the lower tops in the MACD and RSI even as the Dow tested its Nov ‘10 top. The negative divergences may lead to some more sideways consolidation, if not a correction.

At the week’s close of 11410, the Dow has retraced just about 63% of its bear market fall from 14280 in Oct ‘07 to 6547 in Mar ‘09. That is less than a 100 points above the 61.8% Fibonacci retracement level of 11326. These technical levels are well-known to market participants, and could explain the reason why the Dow fell after touching 11309 in Apr ‘10, and why it is still hesitating at current levels.

FTSE 100 Index Chart

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Last week, the technical indicators of the FTSE 100 index chart had overcome their weaknesses but were not looking bullish. I had expected the index to consolidate a bit before moving up. The FTSE closed around the 5800 mark through the week, and the technical indicators have turned bullish.

The MACD is above the signal line and both are rising in positive territory. The slow stochastic is already in the overbought zone. The RSI has risen above the 50% level. At the time of writing this post, the FTSE is trading at 5870, just about 30 points below its Nov ‘10 top. A new high on the index is just a matter of time.

Bottomline? Both the Dow Jones (DJIA) and FTSE 100 chart patterns have recovered from their recent corrections and have embarked on Santa Claus rallies. New highs above the Nov ‘10 tops seem imminent. The dips were good opportunities to add. Now is the time to maintain trailing stop-losses and enjoy the ride.

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