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DOUBLE BOTTOMS


Brewers Index Looking Strong

07/19/06 07:56:46 AM
by Arthur Hill

A double bottom breakout and bullish continuation pattern point to higher prices for the Dow Jones US Brewers Index.

Security:   $DJUSDB
Position:   Buy

While the broad market weakened over the last few months, the Dow Jones US Brewers Index ($DJUSDB) surged above 310 and showed good relative strength (Figure 1). In addition, the index broke the trendline extending down from January 2005 and moved above its November high. This breakout is significant because it confirmed a double bottom that formed from October to May and the upside projection is to around 345. The length of the pattern (35) is added to the breakout (310) for an upside target (345).

FIGURE 1: DJ US BREWERS INDEX. The brewers index surged above 310 and showed good relative strength, in addition breaking the trendline extending down from early 2005.
Graphic provided by: MetaStock.
 
The breakout is not yet "clean," as the index consolidated around 310 the last 11 weeks. Broken resistance at 310 turns into support, and 310 is still the battle zone to watch. The index needs to break free of 310 for this double bottom to hold water.

Turning to the daily chart (Figure 2) for some details on the consolidation, we can see that a triangle formed from mid-May to mid-July. This neutral pattern is dependent on the prior move for a directional bias. The prior move was up, favoring an upside breakout. A move above 320 would confirm the triangle and put the double bottom target at 345 back in play. Failure to move above 320 and a break below 305 would make the double top breakout a failure and put the index back in a large trading range.

FIGURE 2: DJ US BREWERS INDEX, DAILY. A triangle formed from mid-May to mid-July. This pattern is dependent on the prior move for a directional bias.
Graphic provided by: MetaStock.
 
Bollinger Bands also indicate that volatility is narrowing and a breakout is likely soon. Bollinger Bands do not provide a directional bias, but I am impressed with the ability to pierce the upper band last week. Another move above the upper band would increase the odds of hitting the double bottom target.



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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