Dow Jones Headed For Major Breakdown

In taking an in depth view of the Dow Jones this weekend, I have come to a firm conclusion that the rally off the March lows was corrective in nature and not the start of a new bull market.  The DOW Jones had a major head and shoulders breakdown as you can see on the chart that I have displayed below.  The rally perfectly backtested the neckline and price rejection came last week.  You can also see that the DOW staged a false breakout to the upside over a major resistance level near 12700 (horizontal line labeled in blue) and smashed back through it last week. 

Now, for those of you who have been reading my daily blog posts, you will recall that my short term target on the dow was 12450.  We tagged that level on Friday while the market was trading lower on light holiday volume.

What's next?  Well, we are coming into month end and the market should firm up and give us another opportunity to go short this market.  On Friday, I covered my shorts and will look to reload on the next bounce higher.  Let's take a look at the intraday charts to get a feeling as to where this market might stop and reverse.

As you can see on the chart above, the Dow was trading in a tight trading range for approximately 1 month before breaking down on heavy volume last week.  This tight trading range can be referred to as "Cause".  This "cause" was clearly distribution occurring in that trading range.  In looking closer at the chart, you can see a massive spike in selling volume near the end of April.  This was our first sign of distribution.  The breakdown on volume last week confirmed this.  The top in this intraday chart also coincides with the neckline of the head and shoulders top that we discussed in our first chart above.

I am now looking for a bounce into the end of this week and, at this moment, believe that the 12700 to 12750 zone will provide stiff resistance on the way back up.

Happy Memorial Day!  God Bless Those Who Have Served Our Country