Correction Targets For The DJIA

06/08/07 09:19:54 AM

by Arthur Hill

The Dow Jones Industrial Average is up substantially over the last few months, and a correction back toward its resistance breakout is a plausible scenario.

Security: $INDU
Position: Hold

Before looking at the correction targets for the Dow Jones Industrial Average (DJIA), let's look at the current trend and see what it would take to forge a reversal. The DJIA surged more than 1,500 points from its March low, and declines have been limited to just a few days since mid-March. The March trendline has been touched three times and marks support around 13400. The late May low also confirms this support level and a break here would start the correction process.

FIGURE 1: DJIA. Once a correction is under way, how far can we expect it to extend?

Graphic provided by: MetaStock.

Once a correction gets under way, how far can we expect it to extend? Looking at Figure 1, I see two methods to identify a correction target. The first is by looking for support levels. There are no real reaction lows or consolidations from mid-March to late May, so I am relying on broken resistance. Broken resistance levels turn into support, and it is not uncommon to see a pullback to these levels. The DJIA broke resistance at 12800, and this is one target for a correction.

FIGURE 2: DJIA. The Fibonacci retracement levels to watch for are 38% (0.382) and 62% (0.618).

Graphic provided by: MetaStock.

The second correction target involves Fibonacci and Dow theory retracement levels. The Fibonacci retracement levels to watch are 38% (0.382) and 62% (0.618) (Figure 2). Dow theory asserts that a 50% retracement was often normal and the gray lines mark these levels. The 50% retracement jibes with broken resistance around 12800; the 62% retracement is just below and the 38% retracement is just above. There was a lot of strength in this advance, and I would opt for the higher targets by choosing a correction target zone around 12800–13000.

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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Correction Targets For The DJIA

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