Dow Utilities Consolidation At Key Retracement

10/31/03 09:09:04 AM

by Arthur Hill

The Dow Utilities have performed well over the past year, but the average is meeting resistance near a key retracement point with a potentially bearish pattern emerging.

Security: UTIL
Position: N/A

The trend on the weekly chart remains up, but the advance reached a classic retracement level as well as resistance from a prior high. The advance from 162.52 to 257 retraced 62% of the prior decline (313.25 to 162.52).

313.25 -162.52 =150.73
150.73 x .62 = 93.45
162.52 + 93.45 = 255.97

Graphic provided by: MetaStock.

Sharp declines often give way to corrective advances that recoup a portion of the prior decline. In Elliott terms, this decline would be considered an impulse wave, while the advance would be considered a corrective wave. The Fibonacci numbers .382 (38%) and .618 (62%) are typical for retracements and are also popular among Elliott Wave theorists.

In addition to the 62% retracement, resistance at 257 is confirmed by the August 2002 reaction high (red arrow). Including the early October high, there have been three attempts to break above this resistance level. The latest attempt has yet to fail, but volume during September and October was below average (blue arrow). This makes the latest rally from 230 to 256 suspect and open to failure.

The advance over the past year looks like a rising wedge. These are typically bearish patterns that form as corrective advances. As long as the lower trendline holds, it is wise to respect the bears. A move below the lower trendline would signal a continuation lower and open the door to at least a support test around 230. A support break at 230 forges a lower low and turns the weekly trend bearish.

Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

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