Dow Composite Leading The Way

11/10/04 08:51:36 AM

by Arthur Hill

While the Dow Jones Industrial Average (DJIA) shows signs of breaking down, its broader cousin, the Dow Jones Composite Average (DJC), remains strong.

Security: $DJC, DJIA
Position: Hold

The Dow Composite is made up of the Dow Jones industrials (30 stocks), Dow utilities (15 stocks), and Dow transports (20 stocks). More than half of the 65 stocks are not part of the Dow industrials, but rather part of the Dow transports and Dow utilities. Although the Dow Composite is not as diversified as the Standard & Poor's 500 or NYSE Composite, it is clear that the Dow utilities and Dow transports are keeping the Dow Composite strong.

Taking a step back, the average formed a large falling flag (magenta trendlines) and broke trendline resistance in late August (blue arrow). The advance then broke above the prior highs as it extended into September.

Figure 1: Dow Jones Industrial Average. Breakout and 52-week high

Graphic provided by: MetaStock.

Graphic provided by: Reuters Data.

The largest pattern at work is an inverse head-and-shoulders with the left shoulder in March, the head in May, and the right shoulder in August. The average broke above its prior highs (neckline resistance) in September (green arrow), but trading has turned choppy around this resistance breakout at 3070. Despite choppy trading, the last two signals were bullish and these have yet to be negated.

Most recently, the average pulled back to around 3050, consolidated, and then broke resistance with a sharp advance (red arrow). This advance solidifies consolidation support around 3050 and the bulls are on firm footing as long as this level holds.

Key support has been set at 3020, which is confirmed by broken resistance and the late September reaction low. A move below this level would signal a complete failure and turn the medium-term trend bearish. As long as 3020 holds, the bulls are in control and further gains are expected.

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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