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RETRACEMENT


Dow Reaches Its Moment Of Truth

06/07/05 08:25:38 AM
by Arthur Hill

The recent recovery in the Dow Industrials is quite impressive, but this key market barometer is not out of the woods just yet.

Security:   $INDU
Position:   Hold

On the daily chart (Figure 1), the Dow Jones Industrial Average (DJIA) broke a key support level in April and the recent recovery carried the average back above broken support. The pattern from October to March looks like a double top (see the gray box) and the move below the January low is bearish. You can also see that a large negative divergence in the moving average convergence/divergence (MACD) coincided with the double top.

Figure 1: DJIA
Graphic provided by: MetaStock.
Graphic provided by: Reuters Data.
 
Is the current advance back above the support break a mere corrective rally, or was this rally strong enough to negate the double top? Thus far, evidence points to a corrective rally. First, the advance retraced 50-62% of the prior decline. This is normal for a corrective move. Second, there is a resistance zone around 10500 and the average stalled the last three weeks. Even though the average moved back above broken support, the March-April consolidation shows resistance around 10500 (blue oval).

The key lies with the current consolidation. After a sharp advance back above 10400, the average consolidated between 10600 and 10400 in the last three weeks. A move above 10600 would signal a continuation of the prior advance and argue for a move toward 11000. However, a failure below 10600 and move below 10400 would argue for a continuation of the prior decline. The downside target would be the October low around 9700.



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.

Title: Editor
Company: TDTrader.com
Address: Willem Geetsstraat 17
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E-mail address: arthurh@tdtrader.com

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