The past month has been a blast for the bulls! Oil falling apart, a rising dollar, and gold dropping off a cliff… does it get any better for stocks? The time has come to consider taking those profits off the table. The Dow Jones technical chart has reached the territory where people should begin a conservative strategy.

Annotated Dow Jones Chart

This scenario is derived from the pattern the Dow Jones chart has formed: a ‘Rising Wedge’. These patterns are considered bearish and serve as a warning that the current movement may be running out of gas. This pattern can be seen by the solid red and green lines (notice how it looks like a wedge, pointing upwards?). If the Dow Jones falls below the solid green line, all hope is not lost, but it will be the first sign of the bears getting their claws back on the chart. There is a support cushion (dotted green lines) that will hopefully fight off any bearish attack, but if 11,125 can not hold, then look for another 300 point drop down to 10,820 (yellow circle).

Using the technical indicators as some secondary help, they both lean towards the notion that the chart is running low on gas. The MACD is still above its signal line, which is always a positive; however, it is beginning to get ‘toppy’. The Money Flow Index (MFI) is the key cause for concern, as it has formed a very evident negative divergence. This is a big red flag from a technical standpoint as it signals momentum and bullishness is possibly running dry.

On a positive note, a strong volume day that produces a close above the upper trendline (solid red line) would put the current ‘Rising Wedge’ pattern out of play. There ‘is’ still a chance that the Dow will bounce from its current uptrend line (solid green) which would keep the uptrend intact. To keep things realistic though, the negatives outweigh the positives at this point in time.

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