Thursday, July 23, 2009

Dow's Target (Barring Disaster, That Is)

Today, Dow Jones Industrial Average went past 9,000 for the first time since January this year and stayed above despite a modest selloff EOD.

This is a 2.5-year daily chart of Dow Jones Industrial. I am cautiously optimistic that the rally may continue for a short while. "Cautiously", because I do see some mixed messages. First, the volume continues to be unimpressive. Second, MACD does show a negative divergence. But I think what's significant here is RSI. For the very first time since June 2007, it poked through 70. Not even the market top in October 07 didn't see RSI go over 70 (that was a negative divergence, signaling the imminent downturn). Also, ever so slightly (so slight that it could be my imagination) the 200-day moving average seems to be finally flattening out, making the crossover of 50-day MA and 200-day MA more valid.

Provided no new disaster (financial, economic, political, what have you) strikes in the next several weeks, how far could Dow go? For that, I turn to Fibonacci retracements for a change. There are two sets of Fib lines on the chart. The yellow lines are from Oct 07 market top to March 09 bottom. The green lines are from Sept 08 to March 09 bottom. 38.2% retracement from bottom for the yellow line and 61.8% retracement from bottom for the green line seem to almost coincide. That seems like a logical target, around 9,450.

If it ever gets that far, I think it may overshoot and go even higher, perhaps to 50% retracement on the yellow line. That would be 10,334.

One disaster that I could see coming sooner is Treasuries. The yields on 5-year note, 10-year note and 30-year bond all jumped significantly today. The government will be selling over $200 billion worth of Treasuries including notes and TIPS next week. The U.S. dollar is barely hanging on to the dear life just below the long-term support line of 80 (see previous post). It just doesn't seem possible to support all of them, Treasuries, US dollar, and the stock market. Something gotta give, soon.

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