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TECHNICAL ANALYSIS


Bearish Breakout Of DJIA

06/18/12 01:22:52 PM
by Chaitali Mohile

The descending rally of DJIA has breached major intermediate support. Will the index regain its previous levels?

Security:   DJIA
Position:   N/A

A resistance at 13300 was challenged thrice by the Dow Jones Industrial Average (DJIA). It proved to be tough resistance to be breached as DJIA plunged from the top. The full stochastic (14,3,3) in Figure 1 reflected negative divergence by forming a few lower highs, while the lower highs indicated declining momentum.

A fresh intermediate downward rally initiated from 13300 levels gradually slipped deeper, breaching its first support of the 50-day moving average (MA). After violating the moving average support, DJIA plunged harder, losing almost 800 points. Eventually, the bearish force violated the 200-day moving average (MA) support. This breakout was watched as a major bearish event for DJIA.

FIGURE 1: $INDU, DAILY
Graphic provided by: StockCharts.com.
 
However, an oversold stochastic oscillator in Figure 1 coincided with a pullback rally. Also notice that a downtrend in the average directional index (ADX) (14) overheated. The moving average convergence/divergence (MACD) (12,26,9) underwent a bullish crossover in negative territory. Given these negative movements in the indicators it's no surprise that the DJIA is currently witnessing a technical pullback.

Considering the current volatility in economic conditions across the globe, it would be difficult for DJIA to surge above its 50-day MA support.

FIGURE 2: $INDU, MONTHLY
Graphic provided by: StockCharts.com.
 
The monthly time frame chart of DJIA is showing mixed views in Figure 2. The stochastic oscillator has formed a triple top -- a bearish reversal formation in an overbought zone. The MACD (12,26,9) is struggling to survive above the trigger line (red) in positive territory, indicating the high volatility. The ADX (14) has slipped below 15 levels, indicating trend weakness. Therefore, the indicators are uncertain about the future direction of the DJIA.

On the price chart, the index has formed an evening star candlestick pattern, suggesting a bearish trend reversal rally. Generally, this formation initiates a fresh bearish rally and begins a new downtrend.

But traders need to wait for the clear bearish signals from the indicators as well. The full stochastic is the only oscillator that is highlighting the bearish signals, supporting the evening star candlestick pattern in Figure 2, so the index is likely to consolidate in a wide range before beginning its downside journey. The two moving average supports would protect the DJIA from some serious damage in the future.

To conclude, DJIA would continue to remain highly volatile, and later, move sideways in a wide range with the support of the 50-day MA in Figure 1. For long-term investors and traders, DJIA would remain bearish, and gradually, plunge toward the support of short-term and long-term moving averages in Figure 2.



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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