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CHART ANALYSIS


Dow Likely To Test Downside Support

08/25/03 09:20:48 AM
by Gary Grosschadl

The candlestick formations, tweezer top and bearish engulfing pattern, have the Dow primed for some downside action.

Security:   $INDU
Position:   N/A

The weak behavior of last Thursday and Friday in the overall markets needs to be examined with a more critical eye. In spite of some good economic reports, the markets were weak after initial bullish early morning sessions. This resulted in a combination of bearish candlesticks: Thursday's shooting star, combined with the next day's bearish engulfing candle pattern resulted in a possible tweezer top formation (a pincher-like shape formed from the upper shadows).

Looking at the larger picture reveals a sideways channel contained in a larger, possible bearish, rising wedge formation. Either way a move down to test lower support seems very plausible here. The red arrows mark two possible trendline tests at 9200 and 9060 area. Between these marks also resides the 50-day EMA, currently at 9146. Should these supports fail to hold, the next likely lower supports coincide with previous candlestick lows at 9000 and 8850.

Daily Dow showing likely downleg developing.
Graphic provided by: Stockcharts.com.
 
Several indicators add weight to this bearish view. At the top of the chart the DI components (from the directional movement indicator) have started to converge. This shows that bullish power (+DI) is waning while bearish power (-DI) is growing. The CCI (commodity channel index) shows a toppy situation with a move below the 100 level. The indicators below the chart show several negative divergences to price action. As the Dow beats a previous high from mid-June, these indicators have failed to do likewise. This bearish sign often leads to eventual downside action. The stochastic indicator shows a similar overbought situation as the CCI index, turning down from a recent peak.

In summary, a downleg is likely in store here. A surprise move above the tweezer top would negate this view, however the weight of evidence as discussed above is likely to prevail. A bounce at or above 9000 preserves the uptrend on this daily chart (a lower low not being established). A lower bounce could be met with stiffer resistance from the lower trendlines and could set up another failure -- something to watch for.



Gary Grosschadl

Independent Canadian equities trader and technical analyst based in Peterborough
Ontario, Canada.

Website: www.whatsonsale.ca/financial.html
E-mail address: gwg7@sympatico.ca

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Date: 08/27/03Rank: 4Comment: 
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