Dow Jones Industrial Headed For Major Breakdown

In taking an in depth view of the Dow Jones this weekend, I have come to a firm conclusion that the rally off the March lows was corrective in nature and not the start of a new bull market.  The Dow Jones had a major head and shoulders breakdown as you can see on the chart that I have displayed below.  The rally perfectly backtested the neckline and price rejection came last week.  You can also see that the DOW staged a false breakout to the upside over a major resistance level near 12700 (horizontal line labeled in blue) and smashed back through it last week.

Now, for those of you who have been reading my daily blog posts, you will recall that my short term target on the dow was 12450.  We tagged that level on Friday while the market was trading lower on light holiday volume.

What's next?  Well, we are coming into month end and the market should firm up and give us another opportunity to go short this market.  On Friday, I covered my shorts and will look to reload on the next bounce higher.  Let's take a look at the intraday charts to get a feeling as to where this market might stop and reverse.

As you can see on the chart above, the Dow was trading in a tight trading range for approximately 1 month before breaking down on heavy volume last week.  This tight trading range can be referred to as "Cause."  This "cause" was clearly distribution occurring in that trading range.  In looking closer at the chart, you can see a massive spike in selling volume near the end of April.  This was our first sign of distribution.  The breakdown on volume last week confirmed this.  The top in this intraday chart also coincides with the neckline of the head and shoulders top that we discussed in our first chart above.

I am now looking for a bounce into the end of this week and, at this moment, believe that the 12700 to 12750 zone will provide stiff resistance on the way back up.

Comments

[Paul D. Cas...:]

I'll see your head and shoulders breakdown and raise you by a Dow Theory Buy Signal. The Dow typically takes ~110 calendary days to put in an intermediate top off of an intermediate bottom. Along the same lines on average intermediate tops peak ~18% above intermediate bottoms. So far this rally, the peak came on May 2 which is 53 days off the intermediate bottom seen on March 10. Likewise, the Dow is ~11% above the intermediate bottom seen on March 10.

Comparing both days and %'s to the averages leads me to believe the odds favor a continuation of the current intermediate rally. Not a lead pipe cinch, just looking at the odds.

2008 May 27 03:56 PM

[ed auerbach:]

Have some courage. Name a stock or two that should be shorted. Maybe then your fear mongering will turn out to be more than words and you'll have some credibility.

2008 May 28 03:33 PM

[Kunal Vakil:]

I was not trying to be a stock picker, I was merely providing my opinion on the overall direction of the market, which looked to be dead on.

2008 Jun 03 12:29 AM

[kaushal9999:]

great work man .... i m a technical analyst too .... m frm india ...

2008 Jul 29 03:09 PM