A Mini Diamond For The DIA

03/29/06 08:52:14 AM

by Arthur Hill

After leading the market higher, the Dow Diamonds formed a mini-diamond consolidation, and the subsequent break will provide the next signal.

Security: DIA
Position: Hold

The Dow Diamonds (DIA) are no stranger to diamond formations. The stock formed a large diamond from late November to early February and broke resistance with a surge above 109.5. After a falling flag consolidation, DIA continued higher in March and formed a tight diamond over the past eight days. As with the big diamond, this is a neutral consolidation that is dependent on a breakout for a directional signal (see Figure 1).

FIGURE 1: DOW DIAMOND. After a falling flag consolidation, DIA continued higher in March.

Graphic provided by: MetaStock.

Graphic provided by: MS Quotecenter.

A potentially bearish harami formed within the diamond pattern. However, it too requires confirmation and the diamond boundaries hold the key. The harami formed as a long white candlestick and smaller black candlestick on March 22 and 23. DIA formed doji the next two days and we had three indecisive days around 112.5. A break below the diamond low (112) would confirm the harami and the initial downside target would be support around 110.5. This level stems from broken resistance and the trendline extending up from late January.

In addition to the diamond pattern, I am also watching momentum. The 20-day commodity channel index (CCI) has been trending higher since late December, and momentum is bullish as long as the CCI moves higher. I was able to draw a trendline extending up from the December low, and this captures the uptrend quite well. A move below the trendline and into negative territory would turn momentum bearish, and this can be used to confirm a diamond break on the price chart.

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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