Dow Fails At Broken Support

03/04/08 11:24:00 AM

by Arthur Hill

After a sharp decline late last week, the Dow Jones Industrial Average failed to reclaim broken support, and the downtrend looks set to continue.

Security: $INDU
Position: Sell

First and foremost, the overall trend is down for the Dow industrials. The average formed a lower high in December and broke below its November low in January. A lower high and a lower low define a clear downtrend. In addition, the 50-day moving average moved below the 200-day moving average in January. The 200-day moving average is also falling now and the January support break occurred on expanding volume. The bulls are looking mighty weak.

Broken support turned into resistance around 12700 and this support break held. The average tried to move back above the support break at the end of January and again in February. Both attempts failed and 12700 is the level to beat. The overall trend is clearly down as long as this level holds. With a downtrend in place, the odds favor another lower low and this implies a break below the January low.

FIGURE 1: DJIA, DAILY. The stochastic oscillator confirmed resistance with its second overbought reading.

Graphic provided by: TeleChart2007.

The stochastic oscillator confirmed resistance with its second overbought reading (Figure 1). The indicator becomes overbought when it is above 80 and oversold when below 20. Both moves above 80 corresponded with the February highs. The oscillator crossed below 80 and below its signal line over the last three days. This acts as a sell signal and a move toward oversold levels is expected (<20).

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 Fails At Broken Support

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