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Dow Jones Indus, downside pattern not complete....

Mon, Jun 29 2009, 22:25 GMT
by David Solin

FXA

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.  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).

Longer term no change as the March low at 6470 is seen as completing the whole, 5 wave fall from the Oct 2007 high at 14198 (wave V, see numbering on weekly chart/2nd chart below).  This in turn suggests at least another few months of wide ranging and potential for eventual gains above the recent 8878 high, toward 9400 and with some chance of the 10300 area (50% retracement from the 14198 high).  At this point however, the confidence in the path/shape of this multi-month period of consolidating (depth of pullbacks, etc.) is not very high, but will likely clear as it forms.  But 1 thing of fairly high confidence is that the action since March is a large correction and with eventual new lows below 6470 after this extended period of wide ranging plays out (over the next few months).

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Published on  Mon, Jun 29 2009, 22:36 GMT