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Wednesday, April 15, 2009

DJIA Daily Weekly Technical Analysis

Dow Jones Industrial Average Recommendation
- We believe Dow is likely to hit 9000 points in coming weeks. Our weekly chart tells us the retracement of 38.2% is highly possible as a result of RSI bullish divergence. As for the daily chart, a direct breakout of channel is likely to happen soon despite the strong resistance of channel.

Analysis – Weekly Chart
- Bullish divergence (yellow lines) emerged in 5 weeks ago. As
such a reversal of downtrend is likely to happen.
- The retracement is expected to be 38.2% (yellow arrow) as the downswing is more forceful and deeper as compared to previous one. For the first downswing, the retracement is about 50%.
- We do not think the rally will end in coming weeks as the
quarterly upswing has not emerged yet subsequent to the signal of bullish divergence.

Analysis – Daily Chart
- The channel is constructed by connecting peak to low as lower line and the upper line is a parallel line, which is drawn on the most outside peak. The rationale of this way of construction is to filter the noise of a primary trendline. A convincing breakout of a channel is needed to signal a change in downtrend.
- One interesting observation can be obtained from percentage change in every rally and plunge residing in the channel. For rallies, the percentage increase is steadily rising, specifically from 8.8%, 7.5%, 12.0% and 21.6%. For downswing, the decline in percentage is slowing down, from -14.6%, -15.9%, -31.7% to -26.5%. In other words, rallies are getting stronger while downswings are getting weaker.
- From our weekly chart, we believe DOW is expected to retrace 38.2% to 9000 points. Nevertheless, the underlying pattern for it to reach 9000 may take numerous forms.
- From the daily chart, the upper resistance (in yellow circle) must be respected as there are total 3 failed attempts of breakout.
- Two scenarios may play out. Firstly, a decline to 7476 before a channel breakout will take place. Secondly, a direct channel breakout without major decline.
- We believe the probability is skewed toward second scenario as the swings in smaller time frame (5 periods) has been in line with one month time frame (18 periods), unlike the previous rallies in the channel where we can observe swings in smaller time frame. Therefore, a direct breakout of the channel would occur soon without major retracement despite the strong resistance.

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