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TECHNICAL ANALYSIS


DJIA Undergoes Bearish Breakout

06/23/11 11:35:53 AM
by Chaitali Mohile

The long-term rising wedge pattern of the DJIA has ultimately broken downward. Will the index lose its bullish hold?

Security:   DJIA
Position:   N/A

In February 2011, I wrote an article about the Dow Jones Industrial Average (DJIA), mentioning its healthy bullish rally. A rising wedge -- which is a bearish reversal formation -- was getting constructed on the weekly time frame. After a time span of four months, DJIA has completely formed the rising wedge on the same weekly time frame chart, as seen in Figure 1. Recently, the pattern has breached the lower trendline support of the wedge. The converging trendlines of the pattern narrowed the trading range of the index, indicating a bearish breakout.

Eventually, in May 2011 the pattern broke downward, which is considered to be a significant event. The full stochastic (14,3,3) was extremely overbought for a few months, reflecting the possibility of a reversal. A developing uptrend indicated by the average directional index (ADX) (14) plunged in the middle of its journey, affecting the price rally.

FIGURE 1: DJIA, WEEKLY
Graphic provided by: StockCharts.com.
 
The technical conditions in Figure 1 resulted in the bearish breakout of the DJIA. Currently, the index has lost 400 points from the breakout levels. The stochastic oscillator is showing weakness by slipping below the 50 levels. The moving average convergence/divergence (MACD) (12,26,9) is negative in positive territory. Since the ADX (14) is choppy, identifying the perfect trend would be difficult. The current scenario in the financial market is pretty volatile; therefore, a relief rally of DJIA is likely to come under pressure. We can see in Figure 1 that DJIA is resting at 12,000 levels, and therefore, we need to identify the nearest support for the rally. The 50-day moving average (MA) is the immediate support on the weekly time frame. The long-term chart, the monthly time frame would provide additional robust support levels for the DJIA.

FIGURE 2: DJIA, MONTHLY
Graphic provided by: StockCharts.com.
 
In my earlier article, I marked various support levels on the monthly time frame. A bullish trend reversal candlestick -- three white soldiers -- surged to 12,876 levels but failed to reverse the previous downtrend. The ADX (14) remained jittery below 20 levels, with tangled negative directional index (-DI) and the positive directional index.

With reference to the same chart, Figure 2 shows the Fibonacci retracement levels. These levels would extend important support to DJIA. Therefore, the index would remain bullish till it upholds the 61.2% Fibonacci retracement level. The long-term trend has not yet developed and the stochastic oscillator is highly bullish, but the MACD (12,26,9) in Figure 2 is positive. Due to this mixed scenario, the index would challenge its first support at 11275 levels.

Therefore, DJIA is likely to be bullish till it sustains the 61.2% Fibonacci retracement level of Figure 2 as well as the 50-day MA of Figure 1.



Chaitali Mohile

Active trader in the Indian stock markets since 2003 and a full-time writer. Trading is largely based upon technical analysis.

Company: Independent
Address: C1/3 Parth Indraprasth Towers. Vastrapur
Ahmedabad, Guj 380015
E-mail address: chaitalimohile@yahoo.co.in

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