It’s time to look at the broader picture of the Dow Jones Index, and then look at its 30 stocks to see which ones are overextended both above and below its 20 day simple moving average.

Dow Jones Daily:

The Dow (and S&P and NASDAQ) has gently broken above three forms of resistance:

The upper channel of an ascending triangle pattern,
The flattening 50 day EMA,
and the 38.2% Fibonacci retracement of the May to July downswing

While this is a significant and important development, it would be nice to see follow-through on Monday, meaning we get a ‘clean’ or ‘definitive’ close above these levels (all of which correspond with the 11,700 price level).

Momentum has been clearly building (positively diverging, in fact) and is now clearly uptrending.

The only ‘caveat’ in this bullish scenario is that volume has declined through this rally (officially classified as a “counterswing Up”).  This is not surprising, given the surge in volume to the downside which possibly market the end of a capitulation move (where many longs surrendered at once).

Odds are quite favorable now that a short-term up-swing is underway, which could take price at least to 11,975 (50 % Fibonacci retracement) or to 12,250 (61.8% Fibonacci retracement) or even as far as the falling 200 day moving average (the highest target) at around 12,400.  We will have to monitor price action continually for signs of developing strength or weakness.

For a little bit of fun – and for potential trading candidates – let’s look at how far each of the 30 Dow Stocks are extended above or below their 20 day moving average:

Retailer Home Depot (HD) is the most overextended Dow stock, which represents recent strength in consumer discretionary.  Financial stock Bank of America (BAC) is not far behind Home Depot, as the most recent rally has taken these two sectors considerably higher, much to the broader market’s delight.

General Motors (GM) is most extended to the downside, thanks to poor earnings and deteroriating forecasts and fundamentals.

This week ahead could be good for the bulls if the price indeed does break out of the recent resistance levels.  Place careful stops if not and always monitor developments day to day – all forecasts are subject to change when new developments mandate.