Dow Jones Industrial Average Must Overcome Its Prior Highs To Break Out

buyers and sellersMorpheus Trading: After last Wednesday’s Fed announcement, all the main stock market indexes closed the day at new multi-year or all-time highs.

However, the bullish knee-jerk reaction faded quickly, causing both the S&P 500 and Dow Jones Industrial Average (INDEXDJX:.DJI) to give back their post-Fed gains (and then some) just two days later.

Nevertheless, both the small-cap Russell 2000 and NASDAQ Composite showed substantial relative strength during last Friday’s sell-off (both indices only surrendered a fraction of their Fed-day gains).

Furthermore, since last Friday (September 20) was a quadruple witching daywe are suspicious of the validity of last Friday’s weakness.

Given last week’s whipsaw action and price divergence in the broad market, let’s take a basic look at the weekly chart patterns of four broad-based indexes to shed some light on the current technical state of the market.

Last Friday’s bearish reversal completely wiped out Wednesday’s (Fed day) strong advance, thereby creating false breakouts to new highs in both the S&P 500 and Dow Jones.

Below, this is shown on the weekly charts of Dow Jones Industrial Average SPDR (NYSEARCA:DIA) and S&P 500 SPDR (NYSEARCA:SPY), two popular ETF proxies for the Dow and S&P:

$DIA FALSE BREAKOUT

On the chart of $DIA above, notice that the Dow has yet to produce a convincing “higher high” over the past few months and has basically been range-bound. Next, take a look at $SPY:

$SPY FALSE BREAKOUT

The weekly chart of $SPY is more bullish, as a clear “higher low” is in place (which forms the lower channel trendline). However, the angle of its upper channel resistance is still pretty flat (just like $DIA).

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