|Many bearish patterns form with a period of distribution and are then confirmed with a key support break. Double tops, head and shoulders and descending triangles are a few such patterns. The Dow Transports formed a large head and shoulders pattern that shows increased selling pressure (i.e. distribution) and a move below 2800 would project further weakness to around 2550.|
Figure 1: Daily chart of TRAN.
The head and shoulders details are as follows: The left shoulder formed in November, the head in late January and the right shoulder is still evolving. Volume expanded during the late January - early February decline and this reflects increase selling pressure (red dotted line). With distribution clearly underway, a break below 2800 would seal the deal and confirm the reversal. The length of the pattern (head to neckline) is added to the neckline break for a downside projection around 2540 (3090 - 2820 = 270, 2810 - 270 = 2540).
|Figure 2: Weekly chart of TRAN.|
|Graphic provided by: MetaStock.|
|The weekly chart confirms an important resistance level at 3100 as well as the downside target around 2500. Resistance at 3100 extends all the way back to October 1999 and has been tested at least four times. Moreover, the average advanced over 1100 points (61%) since the March low and has yet actually correct. A 50% retracement of this advance, which would be normal for a correction, would extend to around 2500. This potential support level is confirmed by consolidation resistance from May to June 2003 (gray oval).|
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