Technical analysis: Dow industrials set for brief relief rally after support kicks in

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Colin Abrams

WORLD stock markets have had a sharp sell-off since mid-July. The Dow Jones industrial average, however, reached an important support level and reversed up off it, pointing to a (temporary) rally to come.

Dow Jones: Reverses off support

Recommendation: Buy for a relief rally.

Trend: Short term down, but oversold. Medium term sideways. Long term up.

(Daily)

n A sharp sell-off on world markets saw the Dow drop dramatically down to line 1, an important support level, at 16 350. But last Friday night the Dow had a beautiful upward reversal day, off line 1 (as circled). This is pointing to a relief rally to come.

n Its short-term stochastic oscillator (on top) is oversold, and giving a positive divergence, that is making a higher low (unlike the Dow itself), which warns of a rally to come.

n Short-term traders only, buy for a rebound rally, which I expect to be temporary.

n Take trading profits at the 16 800 level. (It was trading at 16 553 at the time of writing). Thereafter, look for a drop back to retest line 1 (16 370), with further support at 16 000.

n Place an initial stop-loss as a closing price below 16 350. Tighten it from 16 750 to protect profits.

Colin Abrams is an independent technical analyst. To subscribe to more recommendations by the author, or attend his courses, please go to www.themarket.co.za.


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