
Stocks Survive Bungee Jump but Technicals Continue to Deteriorate
NEW YORK (TheStreet) -- The five major stock market averages have been sliding since the Nasdaq Composite set an all-time intraday high of 5,231.94 on July 20. As U.S. stocks were setting the stage for a correction, China's Shanghai Composite crashed by 34.7% from a multiyear intraday high of 5,178.86 on June 12 to a low of 3,373.54 on July 9 -- and that was before the worst of the current crash.
China has a major influence on the U.S. economy and stock market, and investors in U.S. stocks could not have ignored the Shanghai Composite's open below its 200-day simple moving average at 3,662.24 on Aug. 21. This began the bungee jump for the U.S. equity averages.
The Dow Jones Industrial Average was already under a "death cross" confirmed on Aug. 11, and this negative technical warning was being ignored by most on Wall Street. In fact, some strategists told investors to ignore it!
As the Shanghai Composite was plunging towards its nadir, the Dow 30 was beginning a smaller bungee plunge of its own. The crash in China sank the index to 2,850.71 on Aug. 26, down 44.9%.
The Dow 30 fell a total of 16.2% from its all-time high of 18,351.36 on May 19 to a low of 15,370.33 on Aug. 24.
The major portion of the fall in the Dow 30 was the plunge of 1,629 points from the Aug. 20 close of 16,990.69 to 15,370.33 on Aug. 24, which began to consolidate on Aug. 25.
For comparison, here's the daily chart for the Dow 30 showing the crash of 1987.
Courtesy of MetaStock Xenith
The Dow 30 closed below its 200-day simple moving average of 2,371.91 on Oct. 15, 1987. From the open of 2,247.29 on Oct. 19, 1987, a.k.a. "Black Monday," the Dow closed at 1,738.74, a one-day crash of 22.6%. On Oct. 20, 1987, the Dow 30 began a long-term recovery from a low of 1,616.21.
Here's the monthly chart since the crash of 1987.
Courtesy of MetaStock Xenith
The monthly chart for the Dow 30 goes back to the crash of 1987, which is that small vertical price bar at the lower left of the chart. The uptrend line through the 1987 crash low of 1,616.21 going through the financial-crisis low of 6,469.95 set in March 2009 comes in at 7,942.68 at the end of 2015. This is the downside risk to the secular uptrend.
The steeper uptrend through the March 2009 low and through the October 2011 low of 10,404.49 was broken to the downside this month with the Aug. 24 low of 15,370.33.
The horizontal line represents the pre-financial-crisis high of 14,198.10, set in October 2007. This is a decline of 7.6% below the Aug. 24 low.
The monthly chart for the Dow 30 will end August negative, given a month-end close on Monday, Aug. 31 below the key monthly moving average of 17,627.12. The monthly momentum reading is projected to end August at 73.31, down from 80.81 in July, falling below the overbought threshold of 80.00. The downside risk until the end of 2015 is a key technical level of 14,557.
The green line on the monthly chart is the 120-month simple moving average which held at lows set in October 2002 and March 2003, and at the low in October 2011.
Here's the weekly chart for the Dow Jones Industrial Average.
Courtesy of MetaStock Xenith
The weekly chart for the Dow 30 has been negative since the week of July 24 -- from a close of 17,830.40. The weekly momentum reading has been declining below the oversold threshold of 80.00 since the week of May 20, as an early warning. This week's reading is projected to decline to 23.23 down from 24.12 on Aug. 21.
A weekly close below the 200-week simple moving average of 15,290 would be another significant warning, and the horizontal line at 14,198.10 is the pre-financial-crisis high.
Here's the daily chart for the SPDR Dow Jones Industrial Average ETF (DIA) - Get Report
Courtesy of MetaStock Xenith
The Dow ETF had a close of $162.80 on Wednesday, well below its 50-day and 200-day simple moving averages of $175.74 and $177.82 -- in a "death cross" since Aug. 12.
This "death cross" was a technical reason for the bungee-jump crash that began with a price gap lower at the open of $172.25 on Aug. 20. The crash accelerated with downside gap-opens on Aug. 21 and on Aug. 24, which led to the intraday low of $150.57. The snap-back of the bungee cord reached an intraday high of $163.68 on Tuesday.
Investors looking to buy the Dow ETF should place a good-till-canceled limit order to purchase the ETF if it drops to $150.82 and $145.24, which are key levels on technical charts until the end of 2015. Note that a GTC limit order to buy weakness to $150.82 was executable given the low of $150.57.
Investors looking to book profits should place a good-till-canceled limit order to sell the stock if it rises to $168.59, which is a key level on technical charts until the end of the week.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.












