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ACCUM./DIST. CHAIKIN


Dow Chemical Under Pressure

12/01/05 09:48:03 AM
by Arthur Hill

While the market charged higher in November, Dow Chemical ran into a wall of distribution and formed a bearish reversal pattern.

Security:   DOW
Position:   Sell

First, let's look at the distribution. I am using a classic volume-based indicator from Marc Chaikin, the accumulation distribution line. It is based on the relationship of the close relative to the high-low range. Closes more toward the high show accumulation, while closes more toward the low show distribution. Even though the stock advanced in October and early November, the accumulation distribution line continued lower, showing distribution (Figure 1).

FIGURE 1: DOW. Currently, Dow Chemical gapped below support and this confirms reversal.
Graphic provided by: MetaStock.
Graphic provided by: MS QuoteCenter.
 
Second, let's look at volume. Upside volume was pretty good at the end of October, but downside volume picked up in the second half of November (red arrows). However, two of the high upside volume days occurred with a long black candlestick and a doji (gray oval). Even though the stock closed higher on the day, the price action during the day was not indicative of buying pressure. This is why the accumulation distribution line moved lower. The two high downside volume days occurred with long black candlesticks, and these show concerted selling pressure (red ovals and arrows).

The stage is set for a failure, and a small head-and-shoulders pattern provides the reversal pattern. If you don't see it well, take a look on the 60-minute chart. The left shoulder formed in early November, the head in mid-November, and the right shoulder in late November. Neckline support is set at 44.69, and a break below this level would complete the pattern. As of this writing, DOW gapped below support, and this confirms the head-and-shoulders reversal; 47 becomes resistance, and this level must be beat to negate the pattern.



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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