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A Breakout For The Dow Diamonds

12/21/04 10:04:34 AM
by Arthur Hill

After a consolidation above broken resistance, the Dow diamonds broke out on good volume and appear to be headed higher.

Security:   DIA
Position:   Buy

The Dow diamonds (DIA) surged in late October and early November, with good volume and a resistance break. Upside volume was consistently above average during the advance. Once resistance at 104 was broken, this level turned into support and the stock formed a consolidation. Note that DIA bounced off the 104 level at least three times in the last five weeks. This reinforces support and provides a level upon which to base a trend reversal.

The overall pattern amounts to a sharp advance and flat flag (magenta trendlines). These are bullish continuation patterns, and the breakout above 106.3 signals a resumption higher. Flags are said to fly at half-mast, and this would suggest a move to around 113. Also note that volume was above average four of the last six days and the stock closed higher six days in a row. This reinforces the validity of the breakout.

Figure 1: Dow Diamonds. DIA surged in late October and mid-November with good volume and a resistance break.
Graphic provided by: MetaStock.
The breakout certainly looks strong, but the relative strength index (RSI) is not impressed. This momentum indicator moved above the 70 level in mid-November and has a negative divergence working over the last few weeks (red line). For now, this is just a minor concern that has yet to be confirmed with price action. Should DIA move back below 106, the flag breakout would be in jeopardy and this negative divergence would be a concern. Further weakness below 104, combined with RSI moving below 50, would be outright bearish.

Arthur Hill

Arthur Hill is currently editor of, 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 and the main contributor to the ChartSchool.

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Date: 12/25/04Rank: 5Comment: 
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