Herman Hemati's  Instablog

During the past few days the financial markets have experienced high volatility. This amount of volatility is result of recent economic data and financial earnings. For example:

     Starts: 557K vs. 574K (prior) 

     Permits: 653K vs. 584K (prior) 

     www.bloomberg.com

PPI (M/M)

      0.2% vs. 1.8% (prior) 

     www.bloomberg.com

     Claims: 482K vs. 444K (prior) 

     www.bloomberg.com

Investors were expecting positive news from the Housing, PPI, and Jobs related data, but with this diverging trend it is hard to predict a sustainable economic recovery out of the recession. While the job market is struggling to improve, this year’s economic data combined with the technical analysis below could result in a flat or negative outlook for 2011.

Statistical Analysis:
                                                                                             

The chart below depicts the yearly percentage gains/loss the Dow Jones Industrial Average has experienced since 1929.

 

Since 1929 – Whenever the Dow Jones has closed a year with more than a 15% loss and the closed the following year with a gain of 15% or more, the third year has always been confined to a range of (+/-) 5%. http://finance.yahoo.com/q/hp?s=%5EDJI 

Could this statistic hold for 2010? The technical analysis below can help provide some insight to where the buyers and sellers may be hiding for the near term.

As you can see from above, the Dow Jones has closed below the key support level of 10,400. This may be a signal for traders to book profits before another possible 200-300 point move downward. Currently the Dow Jones is resting above the 76.4% Fibonacci Retracement level, a break lower could lead to a full retracement.

Another technical indicator that suggests a possible full retracement to 10,300-10,200 level is the divergence formed between the Relative Strength Index and the Dow Jones. As Dow Jones Industrial Average makes new highs, the value of the RSI makes lower highs. This is an excellent example of bearish divergence. Bearish divergence happens when the price makes a new high, but the indicator fails to do the same and instead closes lower than the previous high.

From the above chart it seems that the Dow Jones is having trouble breaking above the 200 day Moving Average. Failure to break higher, the initial break lower portrays a pessimistic view on the bullish trend we have seen the last few months. During this the last few weeks, the markets have moved sharply in different directions. These significant upward and downward movements reflect the Elliott Wave. The start of the wave was formed after the second peak in the market at 10,720. After the formation of the top, the first leg down equaled an approximate 200 point loss and was followed by a 70 point rally which rested the Dow Jones under the 200 day MA at 10,600. During the second day, the markets fell another 200 points. If this drop is followed by a 70 point rally, we could experience the third and final leg downward to the 10,300-10,200 support level. If the selling were to continue downward, the Dow Jones could possibly see 10,000 by months end.

Additionally, the Relative Strength Index and the MACD do not provide much support for a sustainable rally in the next few weeks. As long as the Relative Strength Index resides below 50% and the MACD remains below 0, traders may feel a bearish bias in the market and continue to sell.

- Tomorrows Results Today