A Technical Look at the Dow
The market is at a crossroads after beaming off its March 9 lows. With the financially catastrophic banking numbers behind us, but unemployment still growing, the outlook for the economy is as unpredictable as the future of the major indices.
Breaking Down the Chart
We’ve re-entered the old trendlines of financial crisis’ past. The downtrend that took us through much of 2008 is now back in play, and keeping the price of the Dow at a clearly defined level. At the same time, the index has now created a new trend after the lows set in March. Resistance at the 9500 is still omnipresent, likely due to a psychological barrier and the presence of the old downtrend. The old downtrend, at this point, may be significantly weaker due to a time decay.
RSI on The Market’s Side
The same trend that exists in the price of the index is also showing itself in the relative strength index. The uptrend is promising with strength rising along with the price and there is currently no clear sign of reversal. RSI divergence has been mostly nonexistent.
The State of the Trendlines
The second touch snap of the lower trendline in the old channel suggests that there may not be much strength left in it. However, the top of the channel has been particularly strong, earning a backbone from 9500 which is conveniently priced just above the present level. The size of the candlesticks is also significant, with most appearing as dojis, suggesting that the market is A: indecisive and B: unwilling to make any major moves. The shape of the recent chart has conformed with the trends, showing that bullish pressure is keeping the price in line, but sellers are still stronger.
The Big Picture
There is a sign behind the scenes as well, with a inverted head and shoulders pattern appearing at the bottom of the chart. I am inclined to believe that IF the market can snap 9500, we’ll have a rally to 10340 before consolidating again. At that point, assuming a climb similar to what we have right now, the RSI would be back in overbought territory, where we would either pause or sell off slightly.
Very interesting technicals. I believe we have about a month and a half left of this rally, with things beginning to unravel about November/December when the market realizes the growth so many expected is simply not happening. AT that point, debt comes into the picture big time and panic sets in. Just my .02.
The market is at a very important stage technically. If we look at a chart of the Dow Jones Industrial Average back to 1995, it is sitting below a major resistance line. We have bounced back from this line 2 times this year. As we have discussed in previous essays we expect to see a rally back to this point. It is then that the direction of the market may be determined. If we break resistance above 14,000 and it becomes support the market should create a new uptrend and 14,000 will become solid support. If we fail to break resistance for a 3rd time we may very well see Dow 12,000 again. Elite Trading and Speculation has a chart of the Dow with supporting technical points.
What will determine if we break resistance? There are a number of variables, but one very important factor that may very well be above all is the financial sector. Are we near the bottom of this damaged sector? It is looking as if we may be seeing some positive outlooks in this sector, but we are not speculating our capital on this high risk sector. If we do see the bottom this may very well be enough for the market to break resistance. On a valuation basis there are a number of stocks under priced at the current market levels. We also have the global growth story, which is creating great demand every day. With these two positive bullish catalysts and the scenario of the financials hitting its bottom, should be enough for the market to break resistance. There are also small variables to consider, such as retail numbers for the holidays, consumer confidence, the price of oil, and employment growth. The Feds decision whether or not to cut rates may also have an affect in determining the bottom of the financials, and the new direction of the market. We also must consider the many signs of possible recession. Goldman Sachs upgraded defensive sectors and the price of metals are also signaling possible signs of a recession.
Bottom Line, here at Elite Trading and Speculation we are traders and we can capitalize in all market conditions. We will not speculate short term on the financials for there is very little known of how much damage has been done. If resistance is not broken we will be in a great position to add new positions at great levels for we are bullish on the long term. Market corrections are only bumps in the path to the next uptrend or bull run, and they are healthy for the market.