VOLATILITY REIGNS SUPREME -- DOW BATTLES SUPPORT AT 8000 -- USING STOCHRSI TO IDENTIFY THE SWINGS -- AN INVERSE HEAD-AND-SHOULDERS FOR DIA? -- BONDS FALL SHARPY

DOW CONTINUES ITS SWINGING WAYS... Today's Market Message was written by Arthur Hill. - Editor

Chart 1 shows the Dow Industrials since early October. Despite a number of big swings the last few months, the average is currently trading near the October lows. Essentially, the Dow has gone nowhere the last 3-4 months. However, the Dow is certainly going nowhere in a hurry. The ZigZag feature is set at 10% to show only moves greater than 10%. Since the 10-Oct low, the Dow has produced 10 moves of at last 10%. There were 8 in October and November alone. December was a relatively trendy month with a steady advance. A new downswing started in January as the Dow lost over 10% the last few weeks. Trading is not quite as choppy as October, but daily volatility has increased over the last five trading days. Anxiety is running high as the Dow could be at another inflection point.

Chart 1

DOW BATTLES 8000 ... The Dow is not letting the 8000 level fall without a fight. Chart 2 shows the Dow Industrials bouncing off the 8000 area numerous times since 10 October. The Average actually broke below 8000 with a sharp decline in late November, but quickly recovered and then moved into a trading range. Since this late-November recovery, the Dow has been locked in a 1000-point trading range. Resistance resides at 9000. Support is set at 8000. Needless to say, trading has been tough in this range. Trend-following indicators like moving averages do not work well in choppy markets. Such whippy trading requires oscillators to identify overbought and oversold levels. StochRSI is shown in the indicator window. Once oversold (below .20), a move above .50 signals the start of an upswing. This remains in place until the indicator becomes overbought (above .80). Once overbought, a downswing is signaled when the indicator moves below .50. The blue dotted lines show the last seven signals. StochRSI is not perfect, but can add value to other analysis techniques. The indicator is currently bearish. A surge above .50 would signal the start of another upswing.

Chart 2

AN INVERSE HEAD-AND-SHOULDERS?... While the overall trend for the Dow Industrials remains down, it is possible that an inverse head-and-shoulders pattern is taking shape. Chart 3 shows an example using the Dow Industrials ETF (DIA). This pattern is still premature and has yet to be confirmed with a neckline breakout. The left shoulder formed in October, the head in November and the right shoulder is currently under construction. Notice that the neckline slopes down. This reflects lower highs, which is bearish. In addition, DIA forged a lower low in November to affirm the downtrend. Nevertheless, we must always be prepared for the unexpected. A strong bounce off support at 80 would argue for another run to resistance. While the Dow Industrials has lots of resistance around 9000, the Dow Diamonds has lots of resistance around 90. A break above this level would confirm the head-and-shoulders reversal and target further strength towards 105.

Chart 3

BOND YIELDS SURGE AS BONDS FALL ... Chart 4 shows the 10-Year Note Yield ($TNX) advancing for the fourth straight day. Notice that the move started with a gap four days ago. The 10-Year Note Yield is fast approaching its first resistance zone around 26-28 (2.6-2.8%). This zone stems from the early December consolidation, the 38% retracement and the falling 50-day moving average. After this zone, I would set the next zone around 32-34. This stems from broken support and the 50-62% retracement area. Chart 5 shows the iShares 20+Yr T-Bond ETF (TLT) falling sharply over the last four days. Remember, bonds fall when yields rise and vice versa. TLT is approaching its first support zone from the 50-62% retracement area. Bloomberg and other news outlets attributed the fall in bonds to comments from Treasury Secretary-nominee Timothy Geithner. During his confirmation hearing today, Geithner suggested that China was manipulating its currency. China is the single biggest holder of US Treasury bonds. Giethner's comments sparked fears that China might curtail its bond purchases in retaliation.

Chart 4

Chart 5