Reversing Six Weeks of Bloodshed

The American markets have been unkind since the start of May, but the markets might finally be giving investors a reprieve from a six-week correction. Chart patterns and techhnicals are indicating that a rally, maybe just a dead-cat bounce, is in the cards in the upcoming days. We've already seen three consecutive up days in New York, so there are still buyers out there.

The first positive sign is a convergence of negative indicators. Both the DMI and MACD on the Dow Jones have become less negative and might become bullish this week. Secondly, the Dow Jones is showing support at 12,000 and has held steady over the last three days, a good sign. Lastly, peculiar volume spikes have occurred only during reversals.

I don't need to talk too much about the DMI and MACD, as I've touched on it many times before, but as you can see, the "blue lines" are moving closer to the "red lines" on both lower indicators, suggesting that the selling is about over. A crossing of the blue above the red is considered a buy signal.

With the Dow approaching its inclining 200-day moving average, this could prove to be support for bullish traders. It also helps that the Dow is very close to its 3-year weekly trend line establish back in 2008 and a second dip in mid 2009. The Bollinger Bands have also stopped pushing downwards, constricting at these levels.



Daily volume on the Dow Jones barely budges above 200 million; most days, it doesn't even trade above 150 million. But there have been three instances where daily volume picked up and peaked just below 400 million shares. This occurred in the middle of March, when the markets massively corrected and touched annual lows. Days later, the market would rally and pare all losses in the prior weeks.

The second instance of abnormally high volume occurred in the final days of April, when the Dow Jones and other markets reached multi-year highs. After volume returned to normal on the last day of April, the market started its six weeks of bloodshed.

The third instance of high volume occurred just last week, when the market was preparing itself for the possibility of a Greek tragedy. Although no aid has officially been given to Greece, there is much belief that Greece will not default on its debt. Since the peak in volume, the markets has moved up about 2 per cent. If the abnormal volume is an indicator of reverse trading, we could see a nice move upwards.

The US stock market has not had weekly losses for six consecutive weeks since 2002. After that, the market rallied more than 40 percent in the following year.