A Double Top For The Dow Transports

07/19/06 07:44:47 AM

by Arthur Hill

The Dow transports met resistance around 5000 twice in the last three months, and a rather large double top is brewing.

Security: $TRAN
Position: Sell

The double top is a major bearish reversal pattern marked by two peaks and an intermittent low. The pattern is confirmed with a break below this low. While the confirmed double top is one of the more reliable patterns in technical analysis, it is not infallible and traders should wait for confirmation before turning bearish.

FIGURE 1: DOW TRANSPORTS, WEEKLY. The transports appeared to be forming a double top early in 2005 (red box) and even broke below the intermittent low in April. This break did not hold more than a week, however, and the average went on to new highs.

Graphic provided by: MetaStock.

The Dow transports appeared to be forming a double top in early 2005 (red box, Figure 1) and even broke below the intermittent low in April 2005. However, this break did not hold more than a week, and the Dow transports went on to new highs later that year. Note how the average turned choppy around the support break. This was not a "clean" support break, as the forces of demand remained active around 3450.

The current double top is potential and as yet unconfirmed. There are two highs around 5000 and a low around 4400. A break below 4400 would confirm the pattern and project further weakness to around 3800. The length of the pattern (600) is subtracted from the support break (4400) for a target. See Figure 2.

FIGURE 2: DOW TRANSPORTS, DAILY. The current double top is as yet unconfirmed. A break below 4400 would confirm the pattern and project further weakness to around 3800. The length of the pattern (600) is subtracted from the support break (4400) for a target.

Graphic provided by: MetaStock.

The moving average convergence/divergence (MACD) confirms a loss of upside momentum on the late June high. While the late June high came within a few points of the May high, the MACD formed a significantly lower high. There was less upside momentum on the June advance and MACD subsequently moved below its signal line. This decline continued and MACD broke into negative territory this week. Momentum is bearish and this favors a support break.

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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DOUBLE TOPS

A Double Top For The Dow Transports

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