Tags: Jadeja | Dow | decline | bear

Technical Analyst: Big Drop Coming if Dow Doesn’t Break 13,317

Friday, 31 Aug 2012 10:37 AM

By Michael Kling

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The Dow Jones Industrial Average might be about see a severe decline, warns Sandy Jadeja, chief technical analyst for City Index.

There are several technical signs that the current stock rally is ready to end and a correction will soon begin, he writes in a column for CNBC.

The bears, Jadeja says, could “come out from hibernation and lead the way forward for a market storm in September.”

Editor's Note: Prophetic Economist Warns: “It’s Curtains for America.” See Evidence.

Jadeja points out that 13,317 remains a key barrier that the DJIA has failed to penetrate three times since May 2012, when it reached a high of 12,338. The index will have to break through 13,317 in order to prevent a correction, he warns.

And this month counts as its fourth attempt to break through the barrier. Historically, such fourth-attempt failures have preceded major market moves.

“With the daily chart, technical resistance comes in at 13,060 – 13,190, which has also seen the index fail to hold onto,” Jadeja writes. “Both the monthly and daily chart resistance levels are signaling a potential weakness at current price levels.”

The Chicago Board Options Exchange Volatility Index (VIX) is also worrisome, he says. A low VIX level while stocks are rising shows complacency in markets, as traders lose sight of risk. The last low VIX reading earlier this year in April preceded a decline of 9.7 percent.

Plus, the index has given a five-wave pattern, he says, noting that markets often show patterns of five-waves and three-waves. “The current pattern sports a Five-Wave scenario which may lead to a Three-Wave correction to the downside.”

Another bad sign is that the index has also recently shown what’s called a “Bearish Engulfing” pattern. In that pattern, the index fails to reach a high and closes the week lower. The rally surpasses the previous week’s high yet also breaks previous week’s low.

The bears may have good arguments, writes Eric Parnell, founder of Gerring Wealth Management, for Seeking Alpha.

“Following the recent advance, stocks are now showing signs of fatigue as they fade away from resistance at their previous April peaks,” Parnell writes.

“And the outlook for stocks is challenged to say the least given the uncertainty associated with the presidential election, the fiscal cliff, the ongoing European crisis and the weakening global economy all looming in the months ahead," he adds.

Editor's Note: Prophetic Economist Warns: “It’s Curtains for America.” See Evidence.

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