Dow Nears Support Zone

05/22/06 02:07:15 PM

by Arthur Hill

The Dow Jones Industrial Average has entered a support zone that marks the make-or-break level for the medium-term uptrend.

Security: INDU
Position: Hold

The Dow Jones Industrial Average (DJIA) led the market higher over the last few months and is one of the few indexes to remain above its March and April lows. The Russell 2000, NASDAQ, and Standard & Poor's 500 have already broken below these lows and the DJIA shows relative strength by remaining above these lows. The DJIA did break below the October trendline and this is negative, but the March low marks support around 11000 and I will be watching price action for a potential reversal in this area.

FIGURE 1: DOW JONES INDUSTRIAL AVERAGE. The DJIA is one of the few indexes to remain above its March and April lows.

Graphic provided by: MetaStock.

Graphic provided by: MS QuoteCenter.

The DJIA firmed on May 19 to affirm support around 11000. This area has been a battle zone since December, with three crossovers and three minor reversals. The 11000 level provided resistance in Deceember–January and then support in March–April. Broken resistance levels turns into support and this one is no different. In addition to support from broken resistance, the current decline retraced 62% of the January–May advance. This is typical for a retracement and further argues for support.

I also use momentum indicators to gauge support and resistance. In an uptrend, the zero line should act as support for the moving average convergence/divergence (MACD). Note that the indicator reversed near the zero line in February and again in April (gray boxes). In addition, there were also reversals just above the zero line in early January and March (black circles). The indicator is once again trading near the zero line and it is time to either reverse or turn bearish. Further weakness into negative territory would turn MACD bearish. Should this combine with a support break at 11000, the medium-term uptrend for the DJIA would reverse and further weakness could be expected. For a bull signal, look for MACD to reverse around the zero line and break above its signal line.

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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Dow Nears Support Zone

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