With the Dow Jones Industrial Average lower on the day – falling by almost 1% at the height of today’s selling – some in the market are questioning whether the move is temporary, or the beginning of a new wave lower.

Unfortunately, technically speaking, the latter seems like a good possibility.

The benchmark US equity index has been teetering in consolidation for some time, stalling for the better half of the last two weeks.  Incidentally, the price action has played right into a technical rising wedge pattern – lending to a bearish short term outlook and potential correction.  A rising wedge pattern is indicative of a bearish turn in the price as it shows waning buying momentum through smaller gains.  Oscillators are supportive of a short term correction – with the MACD showing a bearish divergence (lower highs in the signal line versus higher highs in price).  The indication is being coupled with a an RSI signal that is reaching overbought territory.

As a result, we anticipate the index to move lower to support at 12,518.67 with a break through lending to further declines to subsequent levels at 12,315.04 and 12,231.73 (a December spike high).

Given the rather slow movement of the index over the last month or so, a shock to the system could expediate the decline – with the VIX or volatility index spiking to above 24 in the near term.  However, to be cautious, any binaries should be extended out in the event price action consolidation continues a bit further.

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