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MA CROSS


A Moving Average Sandwich For Dow Chemical

05/16/06 08:03:33 AM
by Arthur Hill

Dow Chemical is stuck in a support zone bound by two moving averages, and the direction of the break when it happens will have long-term implications.

Security:   DOW
Position:   Hold

Figure 1 shows Dow Chemical (DOW) and two long-term moving averages: the 200-week simple moving average (about four years) and the 50-week simple moving average (about one year). DOW first broke below the 50-week SMA in April 2005. The stock oscillated above and below this moving average for a few months before it worked its way lower. The decline has been mild and the stock bounced off the 200-week SMA in April 2006. Around five points separates these moving averages, and the next break will have long-term implications.

FIGURE 1: DOW CHEMICAL, WEEKLY. Here, the stock is shown along with the 200-week simple moving average and the 50-week simple moving average.
Graphic provided by: MetaStock.
 
The 200-week SMA is not the only reason to expect support around 40 (Figure 2). A 50% retracement of the prior advance (24 to 57) would extend to around 40, and this is normal for a correction and a logical place for support. There is also a consolidation zone around 40 in 2004, and this area can be extended into 2006 as a support zone.

FIGURE 2: DOW CHEMICAL, WEEKLY. A 50% retracement of the prior advance would extend to around 40.
Graphic provided by: MetaStock.
 
Even though there is clear evidence for support, the current downtrend has yet to reverse. The decline over the last several months looks like a falling wedge, which is typical for a correction. The wedge has tightened in recent months, but there is still no breakout. A move above 45 would break the upper wedge trendline, clear the February–March highs and break the 50-week SMA. This would signal a continuation higher and I would then expect a challenge to the 2005 highs. Conversely, a move below 39 would break the 200-week SMA and I would then look for a move to the 25-30 region.



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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