Dow Jones continues the downward spiral…

By Sandy Jadeja 09:10 7- Jul -2009

The expected volatility for the Dow Jones came in with a sharp sell off prior to the US July 4th vacation.

A short term bullish position turned negative as the bears came in full force taking the index below 8221 which is the base of a head and shoulders channel. The sell signal provided by the RSI is still intact and the index has been unable to take out overhead resistance.

With this in place it appears that the Dow is likely to continue lower towards the anticipated target of 7958 which should be the minimum retracement required for a correction.

The problem traders may face is that until a strong break out of the recent channel takes place, we may still face choppy price action. Volatility is expected to continue through July as the market tries to figure out the intermediate term direction. The channel is now between 8877 – 8206 and the chart pattern is more favoured to the downside. We also have the bearish head and shoulders pattern which could come into effect if the index breaks below 8200 opening the door for a -300 point decline.

If a bullish reversal is to take place the Dow Jones will need to climb above 8580 which is the recent minor high point. But this is not likely to propel the index much higher until we see momentum pick up and a buy signal being posted by the RSI indicator.

The 20 period moving average is also pointing lower adding weight for a decline but this could easily turn sideways if we continue to stay with the price channel. In conclusion, we await the breakout below 8200 to confirm the move towards 7958.

Sandy Jadeja is Chief Market Strategist for ODL Markets and founder of www.Spreadbettingtowin.com where he teaches low risk trading strategies and money management.