Recently, while traveling, I had the opportunity to listen to a financial channel on XM radio. The topic of the day was the sharp sell-off seen in the Dow Jones Industrial Average (DJIA) during the month of August. According to various analysts, the 1,161.83 point sell-off was the biggest in three years. The reality is it could have been worse. As you can see on its monthly chart, the DJIA fell to a low of 15,370.33, another 1,157.70 points lower than its close of 16,528.03.
Note that the August low was a test of support at 15,547.35, the 23.6% retracement level of the previous major (long-term) uptrend from 6,469.95 (March 2009) through the high of 18,351.36 (May 2015). However, the newly established downtrend doesn’t appear to be over with monthly stochastics (bottom study) still closer to the overbought level of 80% than the oversold level of 20%. Also, this past month's low easily took out the October 2014 bottom of 15,855.12.
Using classic Dow Theory, next support would be pegged at the 33% retracement level of 14,394.85. Again, notice that this would also test the series of lows from April 2013 through October of that same year.
Most of the radio conversation revolved around why so much selling was seen. The discussion ping-ponged back and forth between the increased global equity market volatility following China's recent devaluing of the yuan, and the ongoing "will it or won't it" drama of the Fed increasing interest rates in September. The reality is both played a major role in putting the DJIA on the defensive, and both situations seem a long way from being resolved. One analyst observed China might be looking at Plan B or Plan C in trying to stabilize its own Shanghai Composite market, while another proclaimed the Fed will make a move this coming month - maybe.
The bottom line is that the DJIA finally seems to be following through on technical signals established in July when it posted a new 4-month low, following a bearish crossover by monthly stochastics at the end of December 2014. Unlike most analysts, basing their opinions on market fundamentals, I'll continue to hold to the conclusion that the DJIA is in more than just a correction, that its major trend is down, and that lower levels should be seen in the months to come.
And keep in mind, the always exciting month of October isn't that far away.
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