Dow Jones Chart – Support at the 20 DMA

I charted the Dow Jones Industrial Average (aka $DJI, DJIA, INDU, the Dow) after the markets closed on Friday, November 27, 2009 when the Dow finished the week at 10,309.92.

After a big start to the Thanksgiving week, the Dow gave the bulls a full day’s scare in only half of a trading day.  The brightest spot came from the support found at the 20 day moving average.  After falling over 230 points the DJIA bounced when it came in contact with the moving average I have drawn in green below.  That 20 day moving average has come and gone as support and resistance, but two other moving averages offer potential insight as to where the Dow could head to soon if this first line falters.

The 50 day moving average is only about 3% lower, very close to the 10,000 mark.  A 3% drop could be here in a blink and as we’ve seen for months, the 50 day moving average has been the best area of support to consider opening new bullish positions when we get near it.  The only line that seems to have held better than the 50 day moving average over the past six months is the 100 day moving average.  This line marked bottom four and a half months ago.  It’s still trailing the already reduced DJIA levels by about 7%.  A 7% drop from here would still be within a healthy correction range and would offer a decent reversion to the mean for longer term planning.

 I drew and labeled four trend lines that seemed worth watching. 

• Line A is the trend line of higher highs.  INDU has dropped off of that line again which gives it a little upside potential from here.
• Line B is very subjective.  I drew it as somewhat of a midpoint line where I saw a history of temporary support and resistance.  It became interesting again on Friday because it marked the intraday low of the day.  It could hold for a few days, but I won’t be surprised if it breaks fairly soon.
• Line C is the shorter of the two trend lines of higher lows.  It helps to give the 1,000+- range a little more potential support.
• Line D is the longer of the two trend lines of higher lows.  It started almost five months ago and is also close to the 1,000 level that includes line C and the 50 day moving average.

The Williams %R line is also worth noticing.  The 14 day period has broken below the overbought level, but the 28 day period hasn’t yet.  Before I get overly bullish, both of these need to break below overbought for two, preferably three days.  Keep watching this technical indicator though.  It can give early insight into what could turn into a much deeper decline for the index.  Volume was low for the week mainly due to the holiday.  The first couple of days next week will give us a better indication of the true mood of the markets.  Overall, I wouldn’t be surprised to see a slightly smaller drop next week, but more likely another, bigger step higher before the end of the year as money managers chase returns.  The likelihood of the bears taking hold increases significantly when January starts everyone’s score cards over.  That’s when I think some of these lower technical indicators could be put to the test.