A Breakout For The Dow Diamonds

12/21/04 10:04:34 AM

by Arthur Hill

After a consolidation above broken resistance, the Dow diamonds broke out on good volume and appear to be headed higher.

Security: DIA
Position: Buy

The Dow diamonds (DIA) surged in late October and early November, with good volume and a resistance break. Upside volume was consistently above average during the advance. Once resistance at 104 was broken, this level turned into support and the stock formed a consolidation. Note that DIA bounced off the 104 level at least three times in the last five weeks. This reinforces support and provides a level upon which to base a trend reversal.

The overall pattern amounts to a sharp advance and flat flag (magenta trendlines). These are bullish continuation patterns, and the breakout above 106.3 signals a resumption higher. Flags are said to fly at half-mast, and this would suggest a move to around 113. Also note that volume was above average four of the last six days and the stock closed higher six days in a row. This reinforces the validity of the breakout.

Figure 1: Dow Diamonds. DIA surged in late October and mid-November with good volume and a resistance break.

Graphic provided by: MetaStock.

The breakout certainly looks strong, but the relative strength index (RSI) is not impressed. This momentum indicator moved above the 70 level in mid-November and has a negative divergence working over the last few weeks (red line). For now, this is just a minor concern that has yet to be confirmed with price action. Should DIA move back below 106, the flag breakout would be in jeopardy and this negative divergence would be a concern. Further weakness below 104, combined with RSI moving below 50, would be outright bearish.

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
Company:	TDTrader.com
Address:	Willem Geetsstraat 17
	Mechelen, B2800
Phone # for sales:	3215345465
Website:	www.tdtrader.com
E-mail address:	arthurh@tdtrader.com
Traders' Resource Links
TDTrader.com has not added any product or service information to TRADERS' RESOURCE.