Technical Analysis: Dow Jones Moves Toward Intermediate-Term Target, Closes above 25,000

Technical Overview

  • On May 8, the Dow Jones Industrial Average was on the verge of completing a 2-month bottoming pattern. On May 9, the index gave the buy signal with a minimum price target of 26,200 (1,300 points from the point of the breakout – white vertical trendline in Figure 1).
  • Last week’s advance fell less than 5 points short of the 25,000 level. The 8 EMA served as support during the subsequent correction (yellow line).
  • Today (May 21), the index jumped by nearly 300 points to close above 25,000 for the first time since March 13.
  • The Feb 9 & April 2 lows have created a tentative “double bottom” formation. The pattern will be completed if the index breaks above the pattern’s interim high (red horizontal trendline).

Major support levels:

  • The 24,600 level (last week’s base).
  • The neckline of the inverse H&S pattern (white downward-sloping trendline, currently at 24,200).

Major resistance levels:

  • Double bottom interim high at 25,800 (red trendline).
  • Origin of February correction & January high – 26,400 to 26,617 range.

Figure 1. Dow Jones Industrial Average Daily Chart

Implications

  • While the tech-heavy NASDAQ pulled back from its intraday high, DJIA continues to perform strongly, marching towards the upside target obtained from the H&S pattern.
  • In one trading session, the index made up for an entire week of sideways/corrective movement. Such price action is indicative of fast-moving markets, which are leaping towards a specific target. In this case, the completion of the inverse H&S is expected to continue driving the index higher at least until it retests the 25,800 level.
  • If the index moves above 25,800 the double bottom will be completed. A move above January’s high will further strengthen the bullish thesis and shift the long-term outlook to bullish.
  • Long positions in index-tracking ETFs and constituents recommended.

 Outlook

  • Short-term outlook as long as the index remains above its 8 EMA.
  • Intermediate-term bullish as long as the index remains above the neckline of the inverse H&S pattern.

Featured image courtesy of Shutterstock.

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