Commentary: Investors shouldn't be fooled by another breakout...
By Tomi Kilgore - July 15, 2010, 12:01 a.m. EDT
NEW YORK (MarketWatch) -- Being fooled twice is enough to shame any investor, but how about three, or even four times?
The current rally marks the fourth time since early May that the Dow Jones Industrial Average (DJIA 10,287, -80.22, -0.77%) has bounced more than 5%. Previous bounces have taken the Dow above key resistance levels, and yet subsequent declines have resulted in even lower lows. Essentially, the recent pattern surrounding key technical breakdowns and breakouts suggests the Dow is nearing yet another turning point.
It is easy for bulls to fall into another technical trap, since the Dow has climbed above the 50-day simple moving average, which has acted as resistance since the Dow first fell below it in early May, and is now peeking above a downward sloping line that started at the April 26 high and connects the June 21 high. But rather than embolden bulls, the apparent breakout should actually make them skeptical, especially following a six-session rally.
There have been several false breakdowns and breakouts since the correction started in late April.
The first bounce started after the Dow fell below the 200-day moving average, seen by many as a bull vs. bear market divider, for the first time in 10 months; that bounce ended the day after the Dow closed above the 50-day moving average; the next decline ended after the Dow fell below key support at the February low; another rally ended a few sessions after the Dow had broken above the 200-day moving average and traded above the 50-day in intraday trading.
The Dow started the latest rally right after hitting a new low for the year. The break below the June 8 low of 9,757 confirmed a head-and-shoulders pattern, which is a widely recognized longer-term bearish reversal pattern.
Basically, those reacting to technical breakdowns and breakouts have been fooled many times. And keep in mind that the Dow's last six-session winning streak ended on April 26, the day before the market correction began.
The current rally has extended in anticipation of a strong second-quarter earnings reporting season, or one that isn't as bad as the market seemed to be expecting earlier this month, rather than anything concrete. Economic data out of the U.S. and abroad, as well as the downgrade of Portugal's debt by Moody's Investors Service on Tuesday, indicate some of the conditions that started the market's correction--a slowing global economy and sovereign debt risk--still exist.
Even if strong second-quarter results become a reality, investors have already acted on it. The Dow faces tough resistance at the 10,400 to 10,450 level, which encompasses the 200-day moving average and the 50% retracement of the fall from the April 26 high of 11,258 to the July 5 low of 9,614. The June 21 high of 10,594 shouldn't give way without some good, concrete news on the economy. The Dow was up 175 points at 10,391 in afternoon trading.
For investors to feel safe betting on a breakout, the Dow needs to start the next bounce before it hits a new low. There should be some support at the 9,950 to 10,000 level, while drop below 9,757 would indicate another new low was coming. At least investors can then start expecting another false breakdown, and another 5%+ bounce.
Tomi Kilgore writes Taking Stock, a global column that gives insightful analysis about equity-related topics around the world. This column originally appeared on Dow Jones Newswires.
http://www.marketwatch.com/story/dont-be-fooled-by-another-breakout-2010-07-15?siteid=e2eyahoo
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