I charted the daily prices for the past three months on the Dow Jones Industrial Average ($DJIA, $INDU, $DJI, the Dow) after the index closed for the week at 15,425.51 on Friday, August 9, 2013.
When I posted my last chart of the Dow a couple of weeks ago, I warned we were seeing the calm before the storm. The industrial index shook off the bears for a few days, but eventually started sinking as expected. It’s barely 125 points below where it was when I issued the warning, but it appears momentum is picking up for the bears. This week’s chart has some similarities with the chart from two weeks ago, but also has a glaring difference found in the Williams %R indicator. A couple of weeks ago, I noted the Williams %R indicator wasn’t showing a momentum shift yet. That allowed for the short run higher before the weight of the moving averages took over.
By the beginning of this week, the 14-day Williams %R indicator moved below the overbought range for the second time in two weeks and continued to slide through the week. By Friday, the 28-day indicator moved below overbought. It still needs a confirmation day to truly be a bearish signal. The longer span of the 56-day indicator is nearing a break, but isn’t there yet.
As mentioned, this move lower was foreshadowed by the moving averages. The DJIA has traded below its 10-day moving average (dma) in almost every session of the past few weeks. It recovered on most days. This gave the 20-dma an opportunity to play catch up and possibly set-up a 10/20-dma bearish crossover. The lines were only five Dow points apart on Friday and with the Dow closing below both, they will likely converge on Monday. By coincidence (?) on the first day the Dow closed below its 20-dma, it also closed below its recent trend line of higher lows.
Support over the past few weeks has been seen around the 15,415-15,420 area (see the blue line below). This horizontal line broke on Friday, but the DJIA was able to claw its way above it by the close. This push for support could be enough to move the index up to retest its 10 and 20-dma. If it doesn’t break through both lines, expect another sell-off. The next sell-off could be much deeper. The first test will be at the 50-dma, about 160 points lower. If the 50-dma doesn’t hold, traders could see another 250-500 points melt away quickly. By then, the 56-day Williams %R indicator will have fallen below overbought and bulls will have yet another reason to delay buying the dip. Unless something big changes on the macro-economic front, the correction should stop before it falls through the June low.
Then again, the Dow could break through its 10-20-dma again and try to push higher. Even if that happens, resistance is close by at the trend line of higher highs. In other words, the chart shows more room for the Dow to move south than north.