The Dow Jones has been swimming in shark infested waters for the past week, and today may have been the day the sharks finally grabbed ahold. The chart has been forming a bearish pattern, which was highlighted in our previous blog article, http://blog.qualitystocks.net/?p=11697. After the near 200 point drop today, the chart is now sitting right at the support trendline that needs to hold in order for the bulls to still be in charge (yellow circle). The next few days will be critical in determining which direction the overall markets will choose to head.

Dow Jones Annotated Chart: http://Blog.QualityStocks.net/wp-content/uploads/2008/08/picture30.png

If the Dow can manage to bounce from its current trendline, then look for future resistance around the 12,000 mark which is approximately where the resistance trendline would be (solid red line). By looking over the technical indicators (Full STO, MACD, MFI), it does not look like there is a very good chance of a bounce. All three indicators are showing negative divergences, and in the world of technical analysis, that’s “not good!”

With a break of the support trendline (solid green line), there is some good news. Slightly below the trendline, there is a support cushion between 11,221 and 11,125. This may be as far as the Dow drops on the break of the trendline; however, if this cushion is deflated, then look for 10,800 (tan circle) to be tested. If there is large volume during this tumble, then I wouldn’t have very much faith in 10,800 holding either, and the Dow will more than likely be ready to test some new lows.

As I mentioned in my previous blog, if you have no already locked in some profits, it would be wise to do so. In the nasty market we’re currently in, profits should be gobbled up and greed should not be allowed to show its head. If you’re into the shorting game, then be ready, it’s looking like there may be some nice opportunities shaping up!

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