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Bearish Developments In The Dow Utilities

02/03/06 09:00:03 AM
by Arthur Hill

The Dow utilities average is trading well above its October low, but three bearish developments point to a test of this low in the future.

Security:   UTIL
Position:   Sell

Even though the Dow utilities average is trading above its October low, three bearish developments point to a test in the future. First, the Dow utilities formed a bearish rising wedge. These are typical for corrections and the average broke below the lower trendline recently. The advance exceeded the normal retracements (50-62%), but peaked before the early October high. The combination of a lower high and a rising wedge lead me be believe that this is a corrective pattern. Further, the trendline is negative and shows weakness.

FIGURE 1: DOW UTILITIES. A glance at the Dow utility average currently indicates relative weakness.
Graphic provided by: MetaStock.
Graphic provided by: MS Quotecenter.
Momentum is waning and on the verge of turning negative. While the Dow utilities moved above the December high in January, the moving average convergence/divergence (MACD) formed a lower high in January. This created a negative divergence between the indicator and the average. The lower high shows waning momentum, but the indicator is still in positive territory. Further weakness below zero would turn the MACD negative and I would then consider momentum bearish.

The third bearish development is relative weakness. I am comparing the Dow utilities to the NYSE Composite. Both the Dow utilities and the NYSE Composite advanced over the last few months. However, the advance in the Dow utilities pales in comparison to the NYSE Composite. The price relative (NYSE Composite/Dow Utilities) never recovered from the October drop and stayed down in December and January. Since then, the indicator has moved below its November–December lows and the average shows relative weakness.

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: 02/04/06Rank: 4Comment: 
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