Airlines Still Heading Down

03/21/05 10:07:35 AM

by Arthur Hill

Despite losing more than 50% since October 2003, bearish continuation patterns are still emerging in the Dow Jones Airline Index.

Security: $DJUSAR
Position: Sell

The airline group managed to participate in the broad market advance from August to December 2004, but also took part in the 2005 decline. The group led the market lower in January 2005 with a 25% plunge in January. While the Standard & Poor's 500 recovered and moved to a new reaction high in March, the beleaguered airline index wallowed near its lows and two bearish patterns started to take shape.

The big trend is clearly down. The red line represents the 40-week simple moving average (SMA), which is equivalent to the 200-day SMA. It is shown separate from the price chart in order to accentuate its movements. The moving average turned down in March 2004 (blue arrow) and declined the rest of the year. There was a small blip in December (gray arrow), but the downtrend resumed in 2005. As long as this moving average is moving lower, the big trend for $DJUSAR is clearly down and the bears have the winds at their backs.

Figure 1: Dow Jones Airline Index. The big trend is clearly down. The red line represents the 40-week simple moving average (SMA), which is equivalent to the 200-day SMA. It is shown separate from the price chart in order to accentuate its movements. The moving average turned down in March 2004 (blue arrow) and declined the rest of the year. There was a small blip in December (gray arrow), but the downtrend resumed in 2005.

Graphic provided by: MetaStock.

Graphic provided by: Reuters Data.

With the big trend down, bearish patterns are viewed as continuation patterns. The first, and largest, bearish pattern is a continuation head-and-shoulders pattern. The left shoulder formed with the August high, the head with the November high, and the right shoulder with the February advance. A move below 90 would break neckline support and project further weakness to around 60 (120 - 90 = 30, 90 - 30 = 60).

The other pattern is a pennant or triangle. On the weekly chart, the pattern is relatively small (eight to nine candlesticks) and looks like a pennant. In Figure 1, the daily chart, this pattern extends for two months and looks more like a triangle. The prior move was down (January decline), and this gives the pattern a bearish bias. A move below the lower trendline and pattern low (~90) would signal a continuation of the January decline and new lows would be projected. It would take a move above the February high (102) to negate this bearish prognosis.

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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Airlines Still Heading Down

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