Dow Jones Indus, downside pattern not complete

Mon, Jun 29 2009, 22:34 GMT
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FXstreet.com (Barcelona) - The Dow Jones Industrial Average is bouncing from last week’s test of the mid May lows near 8200/50, and after the fall from the June 11th high at 8878. However, the market remains overbought after the sharp gains since the March low at 6470 (see sell mode on daily macd at bottom of chart below), the fall from the 8878 high occurred in 5 waves (see shorter term chart at www.fxa.com/solin/comments.htm ), and the market may be forming a bearish head and shoulders pattern for nearly the last 2 months.

This in turn suggests that the bigger picture downside is not “complete”, and with a downside break of the 8200/50 support area (late May lows, neckline of potential head and shoulders) favored ahead (see “ideal” scenario in red on daily chart below). "Also, a number of time cycles point lower into the end of this week/early next week and suggests that the downside may be sharp," David Solin, analyst at FXA.com

For now want to be short and would sell here (currently 8525), but there is some risk for more topping toward important resistance in the 8550/00 area first (both a 50% retracement from the 8878 high and the area of the right shoulder of the potential h&s pattern). Initially stop on a close above 8650 (good risk/reward), but will want to trail stops lower with the market as the break below 8200/50 (if it does indeed occur), may be a short-lived spike. Further support below there is seen at 7950/75 (38% retracement from the 6470 low).

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