Dow Chemical Testing Key Support

01/12/05 04:00:41 PM

by Arthur Hill

Dow Chemical led the materials sector higher from mid-August to early December, but a double top is taking shape with signs of distribution.

Security: DOW
Position: Hold

Dow Chemical met resistance just above 51 in early December and again in late December. The two reaction highs form a sizable double top that would be confirmed with a support break at 47. Support at 47 is clearly marked by the November 4th gap and December 12th reaction low (green arrows). A break of this level would project further weakness to around 43 (51 - 47 = 4, 47 - 4 = 43).

The right portion of the pattern shows a sharp decline to support and then a consolidation over the last few days. This consolidation looks like a flag, which is typically a continuation pattern. The prior move was down and a move below the flag low (47.50) would signal a continuation of the late December/early January decline. This would also foreshadow a support break at 47 and confirm the double top.

Figure 1: Dow Chemical. The bearish setup is there, but what are the odds of a breakdown? The accumulation/distribution line, which measures buying and selling pressure, already confirmed its double top and suggests a good chance of a support break at 47.

Graphic provided by: MetaStock.

Graphic provided by: Reuters Data.

The bearish setup is there, but what are the odds of a breakdown? The accumulation/distribution line, which measures buying and selling pressure, already confirmed its double top and suggests a good chance of a support break at 47. Even though the peaks do not exactly match up with the double top in Dow, the accumulation/distribution line clearly shows two reaction highs (red arrows) and a support break (gray arrow). More important, this indicator has already confirmed its double top and shows a serious increase in selling pressure. Volume often leads price, and this indicator is forecasting more weakness.

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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