|Recently, we saw a robust bullish rally in the Dow Jones Industrial Average ($INDU) from an intermediate lower low. The descending trendline in Figure 1 shows the lower lows of $INDU. In May 2010, the index plunged to 9500, converting the 50-day and the 200-day moving average (MA) supports to resistance. Thereafter, $INDU struggled to breach both resistance levels. During this process, the DJIA formed lower lows and lower highs, indicating weakness. Meanwhile, the relative strength index (RSI) (14) turned oversold, and the average directional movement index (ADX) (14) was overheated. Both indicators suggested a trend reversal rally.|
|FIGURE 1: $INDU, DAILY. The index has reached the 200-day MA and the descending trendline resistance.|
|Graphic provided by: StockCharts.com.|
|On these notes, the index initiated a fresh bullish rally from the low at 9600. The large bullish candles reflected the strength in the rally. The upward move opened fresh buying opportunities with the strong target of the 200-day MA resistance. In addition, the declining upper trendline intercepted the MA resistance at 10370 levels, and hence, violating this level would be tougher for the index. |
We can see in Figure 1 that $INDU made a high 10407 on July 13, 2010, but closed below the resistance level, indicating the robust bearish force near the resistance levels. A bearish crossover of the 50-day MA and 200-day MA is likely to pour additional bearish pressure on the existing rally. The 50-day MA has marginally moved below the 200-day MA, which is considered as the bearish crossover. However, the two indicators have surged in the bullish zone.
|The RSI (14) has established support at 50 levels and the ADX (14) shows a developing uptrend. In such circumstances, $INDU is likely to undergo a bullish consolidation. The resistance at 10370 would suppress the current upward price action, and the bullish indicators would generate additional strength for future rally. Although the RSI (14) is signifying a fresh buy setup, we cannot enter new long positions in current situations. Traders should stay watchful for the resistance breakout before initiating the trade. For the confirmed breakout, $INDU has to sustain the 200-day MA support.|
|Thus, the consolidation for $INDU is likely to be healthy and could result in a bullish breakout. In the near term, the index will hit the previous high resistance.|
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