DJIA Chart ($DJI.X) – May 15, 2009

If the timing of the Dow Jones’ recent price changes had not fallen on a weekend (when I post my index chart series) I would’ve posted this chart out of cycle in the middle of the week as I did when the same indicators called the S&P 500 bottom two months ago.  It’s that big!  Back then I charted the S&P 500 and saw the Williams %R indicator showing a huge momentum shift.  This week the Dow Jones saw the Williams %R indicator break below overbought and a major trend line broke 3 days ago, followed by 2 more confirmation days.

I always like to see one or two confirmation days on an indicator to see if it’s going to be a blip or a real change that can last.  On the second day after Williams %R broke below overbought it edged up and I thought this dip could be another tease, but then Friday came in with another solid down day and the indicator moved lower again.  Seeing this break and confirmation on both 14 and 28 day periods is enough for me believe this decline could have some endurance.  When the S&P broke north from oversold, the 56 day period came up with it.  It’s not quite there for the $DJI, but might be soon if Monday and/or Tuesday is another distribution (loss) day.

I’d be pretty happy with Williams %R giving me a sell signal on its own, but last week also saw the long trend line of higher lows break support.  Following the line from the March low through the April lows the trend was stable, until Wednesday, the same day Williams %R broke which happens to be when the DJIA closed below its 10 day moving average.  The only other trend line I drew for the bulls still shows support.  That second line follows a less steep trend of higher lows and it offered support on Friday around the same place the 20 day moving average offered support. 

Monday and Tuesday should offer some interesting price movements.  With options expiring this weekend new “bets” will be placed or positions unwound quickly with a new front month of options five weeks away.  After May options expiration, I have much more than half of my account in cash.  I’d like to see if the 20 day moving average holds and if the second trend line I mentioned holds too.  If not, the next area of potential support could be at the 100 day moving average.  I didn’t even draw the 50 day moving average because it hasn’t seemed to carry much weight recently.  I doubt I’ll actually short anything here.  Most likely I’ll keep watching as patiently as possible and if we get close to down 10% from the recent high (to around 7,725+-) I’ll consider selling some out of the money naked puts to buy in lower if assigned.  That might be enough of a decline to give the bears a reason to let off the gas.