A Bullish Divergence for the Dow-Jones

The Dow-Jones average has remained range bound over the past few weeks. In spite of this, it is possible to see two things using technical analysis.

First, support has held after two tests. That's important, since it indicates that the negative news, etc. that drove the market lower both times was eventually overcome. Second, during this period a bullish divergence emerged, which is typically a leading indicator for the market moving higher, which it did after last Friday.

All of this can be seen on the chart below (click to enlarge):

Over the August to October period, the market was range bound, bouncing off support around 10,600. The RSI, which is a momentum indicator, showed that momentum was building, in spite of the return to support. That combination is, of course, a bullish divergence. Often, but not always, this will lead to rising prices for that market.

Let me conclude by stating the importance of the bullish divergence: it ended the possibility that the head and shoulders pattern had been formoing would turn into a significant reversal. So, FOR NOW at least, the market will likely move higher, fueled by the hope that the Eurozone will come up with a viable and systematic plan to end their problems. Remember the saying: buy on the rumor, sell on the news. So, no matter what the Eurozone eventually comes up with, there will likely be some sell off when that plan is released.