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Chart of the Week - March 9, 2009

Dow Jones Industrial Average (DJIA)

DJIA Yearly Chart - Still Trending up but Currently in a Correction Mode

charts are courtesy of Metastock

DJIA Monthly Chart - Broke Below its Previous Trough but...h

charts are courtesy of Metastock

DJIA Weekly Chart - Trending Down Strongly but Approaching Support,  

charts are courtesy of Metastock

DJIA Daily Chart - Continuing to Trend Down

charts are courtesy of Metastock

Legend: blue lines - range for Tsupiteros

            dotted blue lines - range for Position Traders

            red lines - important trend lines

With the Dow Jones Industrial Average (DJIA) continuing to go down almost everyday for the last few weeks in a seemingly endless pit, a lot of people have been asking me, where will this downtrend end? I'm no Nostradamus but I will try to present where I see the Dow will be going from a technical point of view. I will be using a top-down approaching and I will be starting from a very long-term perspective - its yearly chart.

The chart I have here on the Dow is from January 1910. You can see the entire chart on the yearly chart I have above. Notice the relatively huge correction on the left side of the chart. That was the bear market during the 1920s Depression. Remember, each bar on that chart is one year so, during that time, the Dow actually went down by four consecutive years before it was able to recover. Since that major trough on July 8, 1932 at exactly 40.56, the Dow has since been in an uptrend and, believe it or not, is still in an uptrend up to now. The uptrend was halted temporarily from 1966 to 1981 as a long consolidation occurred during that time. During 1982, the uptrend resumed and has continued all the way up to the year 2000. From 2000, a consolidation has remerged. Although the Dow formed a higher high in 2007, that higher high was actually just a part of the Dow's consolidation, which started in 2000. If the Dow is still trending up in this very long-term time-frame, worst-case, this market should not go any lower than its support line at exactly the 4000 level. However, even if the market is able to hold above 4000, I would expect a repeat of what happened from 1966 to 1981, which is a long consolidation probably anywhere between 4000 and 14000 in the next few years to come.

Let's go one time-frame lower and let's now look at the monthly chart of the Dow. Recently, the Dow has just broken below its previous low at 7181, which was registered last October 2002. I heard some analysts at Bloomberg now calling a breakdown of the Dow from a double top pattern. If this indeed is a double top pattern, the rule is, the height of the pattern will be its downside target. The peak of the pattern is at 14,279. The trough of the pattern is at 7,181. Therefore, since prices dropped by almost 50% from its peak, if we follow the Edwards and Magee formula, the Dow is targeted to drop by at least 50% more from its previous trough at 7,181 or to around the 3600 level. However, does a double top pattern apply in this time-frame? A double-top pattern works because those who were expecting the previous trough to hold were surprised that it didn't and were forced to sell below the previous trough, thus, sending prices towards its target. The question is, were there actually people who were buying because they were expecting the previous trough at 7,181 to hold? In my opinion, the market consolidated at around the 7500 to 9500 level a couple of weeks ago because people were expecting the previous low at 7,181 to hold. Does this mean that it is already certain that the Dow will drop towards 3600? The only problem with this scenario at the moment is that, the Dow came crashing all the way down from its peak at 14,279 to its current level of 6,626 or a 7,652 point decline in just 17 months time. In my opinion, the drop was just too fast, too soon. With prices now well below its previous low at 7,181, most of those who got disappointed that the Dow failed to hold above that level, has already sold. At this point, there is no one left else who is going to sell. In this time-frame, although it is obviously trending down, I believe a dead-cat bounce is now due anytime within the next one to two months.

Now, let's go another time-frame lower and let's look at the weekly chart. In this time-frame, the Dow is obviously in a very strong downtrend. The resumption of the downtrend actually started when prices broke below the psychological 8000 level. The nice thing about this time-frame is that the Dow has actually formed a clear-cut road map for us. If the Dow follows this downward channel that it has holding in for the last few months, support should come in at around the 5,750 level, on a worst-case scenario. In fact, if I do a time-series analysis, a trough is likely to occur in the next two weeks, assuming that this downtrend continues. The bearish thing on this time-frame is that, since a lot of people got fooled into thinking that the Dow was already bottoming-out at around the 7500 to 9500 levels, that area in the chart is now a formidable resistance area. I bet a lot of people are currently stuck at those level and are just waiting for a rally in order to get out. From a trading perspective, the best that is market could do is for it to drop towards the 5,750 level and rally back up towards the 7500 level. Of course, that's wishful thinking for now.

Finally, let's go to a more detailed analysis by looking at the Dow from a daily time-frame point of view. In this time-frame, you can see that the Dow is trending down in a slow-death type of trend. This type of downtrend is more bearish than a deep and swift downtrend such as what we saw last October. In other words, this is more sustainable. Why? Because the slow drift is attracting buyers within the trend, hoping that they could catch the bottom. These buyers are fueling the downtrend since, for each small rally, buyers get attracted but once the upswing fails, these same buyers will be the ones who will sell down, thus, making the Dow drop even lower. Of course, at some point, the trend will end. However, unless all the buyers surrender and people no longer buys, I don't think the downtrend will end that easily. For this time-frame, what the bulls would like to see is a day wherein the downtrend accelerates and the volume starts to spike up significantly. That behavior is what could make this downtrend end.

In summary, here is what I think of the Dow in each time-frame:

Yearly - Trending up, Support is at 4,000, Expect Consolidation

Monthly - Double Top Pattern but Currently Oversold, Expect Dead-cat Bounce

Weekly - Trending Down, Support at 5,750, Expect a little more Drop

Daily - Slow-death Downtrend, Looking for a Capitulation Day

Notes:

Short-term Traders/Tsupiteros vs. Medium-term/Position Traders: Recommendation for short-term traders or Tsupiteros are meant to be used by traders whose holding period are limited to one day to two weeks. Medium-term or position traders are meant to be used by traders whose holding period are two weeks to three months. Long-term investors whose holding period is more than three months should not follow these recommendations.