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Dow Utilities Consolidate At Flag Resistance

12/05/05 12:30:30 PM
by Arthur Hill

After getting pummeled in October, the Dow Jones Utilities Average formed a bearish flag and met resistance just above 400.

Security:   $UTIL
Position:   Hold

Rising flags are bearish continuation patterns that form after a sharp decline. The October decline created an oversold condition, and this flag alleviated that condition with a modest advance. A move below the lower trendline and the November low would signal a continuation lower. As an extension of the October decline, the downside projection would be to around 350.

FIGURE 1: DOW JONES UTILITIES AVERAGE. The DJUA surged above 400 and then traded flat. A move below the consolidation low (400) would forge a reaction high around 407.
Graphic provided by: MetaStock.
Graphic provided by: MS QuoteCenter.
 
Even though this bearish flag is evolving it remains far from confirmed, and I am watching the small five-day consolidation for early clues. The Dow Jones Utilities Average ($UTIL) surged above 400 and then traded flat the last six days (Figure 1). Technically, the six-week trend is up, and a move above 407 would keep this uptrend alive. A move below the consolidation low (400) would forge a reaction high around 407 and increase the odds of a bigger break.

I am also watching the 14-day relative strength index (RSI) for short-term clues. The RSI bottomed just above 30 in mid-October and has been working its way higher the last six weeks. There is a clear trendline extending up from mid-October, and this trendline holds the key to bullish momentum. The RSI is strong and bullish as long as this trendline holds. A move below the trendline (47) would break this uptrend in momentum and could be used for an early bear signal.



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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