Sunday, 5 August 2007

Yo DJ(IA)! Spin That Wheel!

We wanna know after a few weeks of wild volatility in the most liquid stock market in the world, where the heck is the Dow Jones Industrial Average (DJIA) headed? First, we need to take a look at where it’s at right now.

Currently, the DJIA is 13,181.90, well off the all time high of 14,121. In fact, the DJIA is now playing along the support of 13,213.90 and it’s struggling to stay alive. The short-term support of 13,577 has already been broken around two weeks back, when the concern about the subprime meltdown and the housing sector has now become more general as they’re now looking into the credit sector. That was the time the DJIA lost around 500 points in just two days. The longer term support for the index still holds at 12,689. But if I were to use the recent peak and draw a vertical line to my support and project this upon the breakdown of the support, I am seeing a downside target of 12.289.50 for DJIA.

What compels me to be so bearish? I’ll show you another angle to this.


Notice how the index behaved from Oct. 2006 to Feb. 2007. DJIA just kept making higher highs while the MACD was steadily declining. This was a bearish divergence telling us a change in the trend is coming. The bottom gave way on Feb. 28 when we all experienced the China syndrome. The index was able to shake that off after a month or so and was back on its way to making higher highs. Now look at the index from June to July 2007. Not only was the index more volatile, but the bearish divergence created looks more dangerous. The MACD doesn’t even show any signs that the bearish sentiment is over as there is no reversal yet.

Is all hope lost? Not really. But we shouldn’t expect things to become rosy in an instant either.

Applying the Fibonacci retracement, we see that DJIA is still staying above the 50% retracement level. So this is still a healthy correction…for now. Once when the breakdown happens, all hell will break loose. It could be a repeat of July 26 & 27 when the index lost 500 points, only it’s on a bigger scale. The bigger question now is how does that affect the local market, or any other market in general? There’s a saying that goes, when the US sneezes, everyone else catches a cold. That is what is happening right now as DJIA has been finishing every trading session lately in triple digits, whether up or down. So the effect is quite significant on every other market, as many tend to follow the US market’s direction. The same is true here only there have been occasions when we did the exact opposite by dropping further when the DJIA went up the previous night.

For those who are going long in the US, good luck to you. Unless the issue shows tremendous strength, I wouldn’t stay long for the moment. It’s shorting time!

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