When I first charted the Dow Jones Industrial Average, aka DJIA (ticker: $DJI) this morning I looked at the three month daily chart to see how bad the short term looked. I missed charting last week, but would have pointed out the trend line of lower highs would need to break before I turned more bullish on the DJIA. That line was tested on Tuesday and didn’t break. Instead, on Friday, the trend line of lower lows broke and even closed below this line. That’s a fairly bearish indicator. Closing below that trend line on Monday and Tuesday would be very bearish. In this chart you can see that the 10, 20 and 50 day moving averages are all above the current price. That’s bearish. I even went back to check on the 100 and 200 day moving averages and they are well above the current DJIA price. This looked so gloomy I turned next to a long term chart to see if the story was the same.
Looking for a chart that was more stable I switched to a five year monthly view of the DJIA. The three month chart above told me to stay on the sidelines a little longer and wait for a better entry point. The five year monthly chart shows hope for the bulls.
The trend line starting fully five years ago that runs along the rising trend of higher lows meets with the 50 day moving average very close to Friday’s close. I’m not going to say “exactly” since there’s room for error in my line drawing for such a long term line. This line is also very close to a couple of highs in the first half of 2006 and the lows of earlier this year. That extra line is one more indicator that we could be near a short-term bottom. I actually think this move down to retest the January and March lows is healthy for the markets. Oil above 130 will take its toll on earnings in many industries and if the markets had not pulled back to discount that some the fall could’ve been worse.
With both of these charts in front of me, I know I have to stay cautious and be happy that I survived June options expiration with a profit on all my positions. I might not have such luck in July. I don’t want to make a bullish trade until I see the trend line in the three month chart find support again. If it does in the next few days, I will likely make a few trades based on the longer term chart that shows support at the current price still.
Hi
Your prognosis seems to agree with a lot of the chartists I’ve been seeing on CNBC and Bloomberg who seem to think the DOW will fall back to around 10,000 and S&P a similar percentage – all very gloomy but hopefully in a few months time there will be some bargains to be had, here in the UK some big banks have fallen by over 70% in the last year ! Surely at some point they’ve got to be worth going long on ?
Thanks, I hope we don’t go that low, but I won’t be shocked if it does. If oil stays high that’s the only direction earnings can take us.