Dow closed above 13,000. The real deal, or a dead cat bounce?

February 28, 2012

Today ^DJI closed above 13,000 for the first time since May of 2008. 13,000 is a nice round number and you shouldn’t underestimate the psychological impact of breaking a resistance level like that. But when I took a quick look at the chart, it turned out that the advances of the last few days actually happened on relatively low trading volume (you can visually see this on the volume bar at the bottom of the chart). This is not a good sign. A quick look at RSI and OBV, those short term technical indicators don’t look too good either. In other words, we have a “price-volume divergence”. The price might drop again in short term.

So is this a secular bear market rally (“dead cat bounce”)? My guess is “no”. The support line I drew on this chart (the red line) seems to have held up quite nicely since July of 2009. In other words, every time price dropped down close to that support line, it bounced back up again. The common technical trader wisdom is that if this bouncing action repeats a few times on high volume, you normally end up with a solid reliable support line (an uptrend in this case). So even if DJI drops down a bit, I think it’ll bounce off of that support line and the uptrend will continue. Or maybe I just woke up on my optimistic side this morning, who knows?

PS. And yes, with some stretch of imagination you can see an upside-down head-and-shoulders pattern in early 2009 right before this uptrend started — further confirming a change in trend from downward to upward.

^DJI closed above 13,000

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