Dow Does It Again

09/07/05 07:59:29 AM

by Arthur Hill

Once again, the DJIA has managed to forge a higher low and surge after a bullish candlestick reversal pattern.

Security: $INDU
Position: Accumulate

After sharp declines, the Dow Jones Industrial Average (DJIA) formed bullish candlestick reversals in the last five months. Bullish engulfing patterns formed in April and May. A hammer formed in June and two bullish engulfing patterns formed at the end of August (green ovals). See Figure 1.

FIGURE 1: The DJIA formed bullish candlestick reversals consistently from April to August 2005 (green ovals).

Graphic provided by: MetaStock.

Graphic provided by: Reuters Data.

The first three patterns were confirmed with further strength and resulted in higher highs (green arrows). The recent sharp advance confirmed the bullish engulfing patterns at the end of August, and the upside target is a higher high. There is no set method for candlestick reversal targets, but the prior pattern of higher highs suggests a higher high and then a pullback.

FIGURE 2: DJIA. A rising wedge formed over the last five months.

Graphic provided by: MetaStock.

Graphic provided by: Reuters Data.

There is little question that the confirmed bullish engulfing pattern makes the short-term trend bullish, but the medium-term picture is less clear. A rising wedge formed over the last five months (Figure 2). These are potentially bearish patterns that form as a corrective advance. However, traders should respect the advance as long as the wedge rises (higher lows).

A failure for the DJIA to move above 10700 and a move below the late August low would confirm the rising wedge and argue for a continuation of the March-April decline. The downside projection would be south of the April low. For now, the confirmed bullish engulfing rules the roost and traders should abide by this pattern until proven 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.

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