The deterioration in the stock market is gaining momentum after the Dow Jones Industrial Average formed a death cross, a technical indicator that could signal a potential longer-term breakdown. The death cross signal occurred yesterday after the 50-day simple moving average fell below the 200-day SMA. The recent slump has produced 9 out of 10 down days and created fresh 2015 lows.
Price action on the 30-company index is identifying the next key level of support to come from the 17,070 area. Major support could come from the 16,917 level. It is around that area that price could form a bullish butterfly pattern. Point D is targeted with both the 161.8% Fibonacci expansion level of the X to A leg and the 200.0% Fibonacci expansion level of the B to C move.
If the bullish reversal occurs, we may target a major rally that eventually could take price to fresh 2015 highs. If price invalidates the reversal pattern, further downside could target the 16,669 zone.
The trade: Buy Dow Jones Industrial Average at 16920 with a stop loss at 15,920and a take profit at 17,920. The Risk/Reward Ratio is around 1:3
Edward J. Moya
Chief Technical Strategist
WorldWideMarkets Online Trading