The Dow Jones Industrial Average (DJIA) is up around 4% since its low last week Thursday. However, we are concerned that this is a bear market rally. It isn't a surprise that the index has lifted over the last few days, given the amount of punishment it was subjected to since the beginning of May.
The Thursday low represented a 5.5% decline for the first 12 days of the month. However, we note that the bounce off this level is now at key resistance around the 32,600 level (green shaded horizontal). We worry that shorts may target this area, given the bounce in the general market weakness.
Consider FXCM's H4 DJIA CFD, the US30. Technically, the upleg resembles a rising wedge, which is a bearish continuation pattern. We can apply a measured move to the pattern and derive a technical target near 30,000, which represents a 7.5% decline from current levels.
The measured move is not written in stone. Stock market variables continually change, and in turn, expectations often change, making the target level null. In this regard, keep an eye on the index's H4 stochastic which has rolled over (red ellipse). If it declines below 20 (blue arrow) and holds there, the measured move will have more credibility.
At the very least, it suggests that caution still needs to be exercised in this market. Traders should use stop losses and apply sensible risk management strategies to their positions.
Senior Market Specialist
Russell Shor joined FXCM in October 2017 as a Senior Market Specialist. He is a certified FMVA® and has an Honours Degree in Economics from the University of South Africa. Russell is a full member of the Society of Technical Analysts in the United Kingdom. With over 20 years of financial markets experience, his analysis is of a high standard and quality.