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REVERSAL


Auto Manufacturing Index Reaches Dead End

08/18/05 07:56:17 AM
by Arthur Hill

Chart features and a key momentum indicator suggest that the current rally in the Dow Jones Auto Manufacturing Index is over.

Security:   $DJUSAP
Position:   Sell

On the price chart (Figure 1), the current rally has reached a key retracement zone and broken support. Corrective rallies typically retrace a third to two-thirds of the prior decline. The current rally has retraced 50-62%, and this puts it in the upper reaches of a classic retracement. With the rally near the top end of a typical retracement, traders should be on guard for a reversal.

In addition to the retracement zone, there is also resistance around 230 from broken support. It is a basic tenet of technical analysis that broken support turns into resistance.

Figure 1: Dow Jones Auto Manufacturing Index. Technical analysis notes that broken support turns into resistance.
Graphic provided by: MetaStock.
Graphic provided by: Reuters Data.
 
The current pattern looks like a rising wedge. These are typical for corrective rallies, but should be respected as long as the lower trendline holds. The index broke below the lower trendline with a decline in August and the early signs of a breakdown are in place.

The moving average convergence/divergence (MACD) also confirms weakness. This important momentum indicator formed a negative divergence late last year, and this foreshadowed a steep decline (red line). The MACD formed another negative divergence over the last few months and moved below its signal line earlier this month. The indicator is currently trading around the zero line, and further weakness would turn momentum definitively bearish.



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
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Date: 08/18/05Rank: 4Comment: 
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