June 11, 2010: Dow 30
June 11th, 2010
· While the Dow Jones Industrial Average is often criticized for being too narrow of a market gauge to be relevant in any market analysis, it does provide a glimpse into prevailing market sentiment. And that sentiment, we believe, is acute uncertainty and lack of conviction.
· 2009 closed at 10,428.05 which was up 61.18% from the March 2009 low and up 18.8% for 2009. While that 18.8% may not seem like much, the first ten weeks of 2009 seemed like the financial world was in the process of outright collapse. If someone had said in January or February that the index would reverse and post an 18-19% gain for the year, it is doubtful if anyone would have taken that person seriously. As 2009 wrapped up, the broad market seemed to shift gears and begin to consider market risk again.
· 2010 has produced two separate periods of rallies up through 10,428 as well as two periods of declines that carried the index below 10,428. Further, the mystique around Dow 10,000 is alive and well.
· As we are closing in on the half-way point of 2010, it is noteworthy that there have been two days this year in which the index has spent a full trading day below 10,000. Sixteen days of 2010 have produced intraday dips below the 10,000 barrier.
· During April 26 to June 8, the Dow 30 declined by 13.3% which was the sharpest “correction” it has experienced since the current bull trend began in March 2009. On June 3, the index spiked up to 10,315. That rally took the index up through its 200 Day Moving Average (then at 10,299, now at 10,313) but sellers pounced as soon as the Average was breached.
· 10,331 is a 38.2% upside retracement of 2010’s range.
· We believe the current volatile consolidation below the Average and below the break-even level for 2010 suggests that sentiment leadership is in a state of transition.
· Technically, if the bull trend is to reassert itself in a sustainable fashion, the index will take out 10,331 and methodically push up through 10,508 which is a 50% upside retracement of 2010’s range. However, until that trend clearly develops, we continue to recommend an increasingly defensive/cautious approach.
We believe that likelihood of a downside resolution to the current consolidation is far greater than an upside resolution. Further, our work suggests that the index has near-term risk to the 8800-9000 area.