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Warning! The Dow is at Risk of Breaking Down! – June 28, 2010


Hello to you all! Today’s blog is actually my first post regarding the US equities market, specifically the US’s Dow Jones Industrial Average. The DJIA’s price chart, as you can see, is very similar to the one of the S&P 500 which my colleague published earlier (see his post here). Basically, the Dow is a price-weighted average of the 30 significant stocks that are traded on the New York Stock Exchange and the Nasdaq. Moreover, to technical analysts, the Dow is used as a leading barometer of the US’s economy. Well, if this is the case then we all should be worried. The ^DJI, together with the S&P 500, are both showing some signs of a possible reversal to the downside. Notice that the DJIA is also forming a potential head and shoulders pattern. A break of the formation’s neckline just below 9,750.00 would send it all the way down to 8.250.00. Both the MACD and the RSI are also giving bearish signals with the former’s histogram just about to turn negative. the latter, on the one hand, had already crossed below the 50-line, indicating that the index’s momentum is weakening. On the positive note, if the neckline hods, the Dow could once again reach the high at 10,593.86 or even revisit its 2010 high at 11,258.01.

Just recently, the US’s House of Congress and Senate reached an agreement regarding the finalized financial reform bill. The bill, which is expected to be signed into law in the days to come, will ban banks from trading for their own account and making risky bets with their own money. This, of course, would naturally limit risks, and prevent a similar financial meltdown that occurred back in ’08 though it will likewise place a cap on the banks’ and their shareholders’ potential income. So coming into this week’s G20 meeting, US President Barack Obama urged the rest of G20-member countries to do the same. His position, however, was met with some resistances as the countries which have budget deficits raised that they to to address the imbalances first before overhauling their systems. As the meeting goes along, any disparity among the leaders on how to support the global recovery could send the DJI lower.

Another high impact report that could possibly weigh on the DJI is the upcoming US NFP report. US firms are projected to have slashed for the first time in four months a total of 103,000 employees in June, possibly causing the country’s unemployment rate to worsen to 9.8% from 9.7%. Such scenario, if deemed accurate, could cause some risk aversion. And since the Us is the world’s largest economy and the most followed one, a slide in its major indices could send negative shock waves across the globe. Most of the anti-dollar currencies would likely lose some support as well against the safer USD and JPY if and when a breakdown happens.

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