The DJIA's Moment Of Truth

12/02/08 09:34:13 AM

by Arthur Hill

After a sharp four-day rally, the Dow Jones Industrial Average is nearing resistance, and the moment of truth is approaching for the bulls.

Security: $INDU
Position: Hold

Three items point to resistance just below 9000. First, the current advance retraced 50% to 62% of the November 2008 decline. Corrective rallies often meet resistance in this retracement zone. Second, the trendline extending down from mid-September also marks resistance just below 9000. Figure 1 is shown with a semilogarithmic scale to reflect moves as percentage changes instead of absolute price changes. This means the trendline reflects the rate of descent over the last few months. The rate of descent is rather sharp, and a move above the trendline would change this rate of descent.

The triangle center marks the third resistance point just below 9000. This triangle represents a consolidation pattern with lots of churning and volatility. The Dow Jones Industrial Average (DJIA) broke the lower triangle trendline with the November decline and then rallied back into the triangle. While the bounce looks impressive, this consolidation zone now marks resistance and the center is just below 9000.

FIGURE 1: DJIA. The semilog scale shown here reflects moves as percentage changes instead of absolute price changes.

Graphic provided by: MetaStock.

The top indicator window shows the 14-day relative strength index (RSI) meeting its moment of truth around 50. In a downtrend, the 50-60 zone marks momentum resistance for the RSI. This area offered resistance in late September and early November. A nice positive divergence formed over the last few months, but a move above this resistance zone is needed to prove that this is more than just an oversold bounce.

The DJIA became oversold in October and plunged to new lows in November. These moves created oversold conditions and the current surge relieved these conditions. With the DJIA and the RSI hitting resistance zones, the moment of truth has arrived for the bulls. A break above 9000 would be bullish and argue for further strength toward the next resistance zone.

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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The DJIA's Moment Of Truth

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