Bearish Failure Swing For The Dow

02/02/04 11:02:08 AM

by Arthur Hill

The Dow suffered its largest two-day decline since 26-Sept and a key momentum oscillator flashed a sell signal. Even though the near-term outlook is cloudy, any decline from current levels would still be deemed a correction within a larger uptrend.

Security: INDU
Position: Sell

The last significant signal for the Dow was the early December breakout at 990 (green arrow). This set the stage for the sharpest advance since May-03 (1120 points or 10.46% in 1 1/2 months). The advance was pretty much straight up without a correction or significant consolidation.

Graphic provided by: MetaStock.

With the recent decline from 10705, the Dow broke the trendline extending up from 9585 and RSI forged a rare bearish failure swing. This bearish failure swing occurs in four stages. First, the RSI moves above 70 and the underlying security records a new reaction high (black arrows). Second, the RSI declines below 70 (blue arrow). Third, the RSI forms a reaction high below 70 while the underlying security moves to a new reaction high (gray arrows). This also forms a classic bearish divergence between the indicator and the security. Fourth, RSI moves below its prior reaction low (red arrow) for final confirmation.

A correction would be expected to retrace a portion of the prior advance (9585 to 10705) and there are three downside targets to watch. First, the January low marks support around 10367 (1). Second, a 50% retracement of the prior advance would extend to around 10150 (2). Third, a deep correction could extend all the way back to broken resistance (turned support) around 990. This would be a bit excessive though and the second target at 10150 is more realistic over the next few weeks.

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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Bearish Failure Swing For The Dow

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