Dow Tests Support while Financials Break it

Nov 21, 2007: 12:29 PM CST

As I mentioned was a possibility in a previous post, the Dow Jones Industrial Average tested the closing lows from August at 13,800, and has found temporary support there. Whether buyers will hold this level is yet to be determined, but they have a chance at these levels.

The pre-holiday periods usually are bullish days, but today’s price action so far has violated that notion. Price sends a strong signal when it violates a tendency or expectation that has built historical patterns.

Let’s drill down from the top:

The weekly action paints a bearish technical pattern, in that price has formed a divergence (examining the most recent swing highs in price with the swing highs in the bottom panel oscillator) and has potentially formed a quick double top. Of key note from other technical structure is that price attempted a test of the weekly 50 period moving average, got a bounce, found resistance at the falling 20 period MA, and now has broken through the 50. Weekly volume has also been clearly higher on sell weeks than buy weeks. The good news is that we’re above the price that began 2007, so we’re still positive for the year.

The daily chart shows price testing support at the August closing lows. We may get a bounce here but it likely will be short-lived, and only rise to 13,200 at best. Price would shift the technical picture into a more bullish posture if it takes out 13,200.

The 20 period MA seems likely to cross beneath the flattening 200 period. The convergence of the 200 period and the 20 period MA should serve as significant resistance for bulls to overcome.

It would scare me (from a bullish perspective) if we were to take out the low of the key reversal day carved out in mid-August (12,500).

On to the Financials (the XLF SPDR):

XLF (Financials) not only have broken their August lows, but they have decimated them. There’s little to offer in the way of bullish comments for the Financial Sector ETF. We have a confirmed downtrend with price having recently made “three pushes” lower. Perhaps the “three push” pattern exhausted a great deal of selling, but because the trend is still down, it is unsafe to trade against them.

The moving average orientation is in the most bearish position possible (20 beneath the 50 with both beneath the 200… in this case, a great deal beneath the 200).

Financial stocks can lead the broader markets, and if so, then the markets as a whole are in for some trouble potentially.

The weekly chart looks so much worse than the daily chart:

A double top formed in early and mid 2007 and price has rolled over from there.

Price has now broken the 200 period MA and the moving averages as well have entered ‘total bear’ territory (as mentioned above).

Price is making new lows, not seen since late 2005.

As a bonus, let’s look at the Philadelphia Housing Index:

This chart shows probably one of the most perfect ‘bearish’ trends I have seen. The swings are narrow and predictable (reasonable) and price finds resistance at both the 20 and 50 period daily moving averages.

Although the most recent price swing exceeded those of the last few months, and price made a new momentum low, there is no sign of a bottom from the perspective of technical analysis.

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