We feel that the index is at a pretty important juncture and should the index find support at this 6680 level, it could possibly rebound to retest its 6-month downtrend resistance line (red line) at around 7415.
However, should the index convincingly break through this level, it could slide all the way down to around 5700 level (a few minor peaks in 1996).
Likely near-term scenario ? rebound to 6-month downtrend resistance line 1) Based on the previous 1-year channel, the DJIA managed to stage three rebounds off the bottom channel line before it crashed through on the fourth attempt.
2) Assuming the pattern holds, the DJIA should also stage a rebound off the bottom line of the current downtrend channel.
3) The technical indicators also support a possible rebound ? the money flow index has dropped deep into the 20% region during this current bear market (has only happened twice since the peak in Oct'08) and a rally always takes place soon after.
4) The MACD is also currently at the same level at which the previous two rebounds took place although it has yet to turn up sharply like theprevious two times.
Likely medium-term scenario ? further downside to 5700 level
1) But the medium-term outlook remains bearish ? we expect more bad news to come over the next few months from the economy and financial sector.
2) We have also yet to see any positive divergence between the technical indicators and the current trend to suggest a bottom is near and a reversal is in sight.
3) As such, we believe that the near-term rebound may fail to convincingly clear the 6-month resistance, and see a pullback to 5700.
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