Dow Composite Is Pullback Target

12/09/04 09:35:18 AM

by Arthur Hill

The breakout in the Dow Composite remains valid and a pullback to broken resistance would be normal.

Security: $DJA
Position: Hold

The Dow Composite was featured on October 11 with an inverse head-and-shoulders pattern that was already confirmed with a breakout. In addition, the Dow Composite was showing good relative strength, leading the Dow industrials over the last few months. The Dow Composite reached the upside target of the head and shoulders and now looks ripe for a pullback or consolidation.

The upside target of the head and shoulders was to around 3300. This target is found by measuring the distance from the neckline to the top of the head and then adding this amount to the neckline breakout (3070 - 2835 = 235, 3070 + 235 = 3305). Even though the Dow average has reached this target, it could still move higher. However, the odds of a pullback have increased and a move below minor support at 3260 would set the corrective wheels in motion.

Figure 1: Dow Composite. The composite reached the upside target of the head-and-shoulders pattern and now looks ripe for a pullback or consolidation.

Graphic provided by: MetaStock.

Graphic provided by: Reuters Data.

Now that the odds of a pullback have increased, it is time to project the length of a potential pullback. First, there is a support zone between 3020 and 3140 (gray oval). Second, a 50-62% retracement of the August to December advance would extend to the 3070-3120 area. Third, broken neckline resistance at 3070 becomes support and a "throwback" to broken support is quite common. These three items suggest that the average could correct back to around 3100, and such a pullback could offer a second chance to partake in the uptrend.

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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Dow Composite Is Pullback Target

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