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DOUBLE BOTTOMS


Another Airline Double Bottom

11/11/04 04:11:36 PM
by Arthur Hill

For the second time this year the Dow Jones Airline Index (DJUSAR) confirmed a double bottom. The first one failed and the second one remains above the trees for now.

Security:   $DJUSAR
Position:   Accumulate

A double bottom is a bullish reversal pattern with two relatively equal lows and an intermittent high. This high is key resistance and must be broken to confirm the double bottom. Moreover, a strong security should hold the breakout, and it is important to get confirmation from other indicators.

The DJUSAR formed a double bottom from March to May and broke above key resistance in June (blue arrows). However, this breakout failed to hold for even a week and the index declined back below the breakout and below minor support at 108.7 (red arrow). The failure to hold the break suggested something was wrong and the sharp decline below 108.7 totally negated the pattern. In addition, the moving average convergence/divergence (MACD) broke above its signal line but never managed to make it into positive territory. Even though momentum was improving, it was never actually positive.

Figure 1: Dow Jones Airline Index
Graphic provided by: MetaStock.
Graphic provided by: Reuters Data.
 
Here we are again. The index formed a double bottom from August to October and broke above key resistance in early November. In addition, the index broke above the trendline, extending down from October 2003. The breakout has held, and so far, so good. A move back below the break (105.79) would be negative, and further weakness below the 100 would suggest a failed pattern. MACD also moved above its signal line, but remains in negative territory. The signal line crossover shows improvement, and more work is required for MACD and momentum to turn positive.

For now, the breakout is bullish until proven otherwise. As such, the upside target is around 126 (105 - 87 = 18, 105 + 18 = 126). This area is confirmed by the December 2003 to January 2004 consolidation. Watch the levels I've outlined to prove the breakout otherwise.



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.

Title: Editor
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E-mail address: arthurh@tdtrader.com

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