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Dow Bounces, Hits Resistance Zone

07/06/06 09:01:46 AM
by Arthur Hill

After a big bounce in the last few weeks, the Dow Jones Industrial Average hit a resistance zone.

Security:   INDU
Position:   Hold

On the price chart (Figure 1), the Dow Jones Industrial Average (DJIA) has considerable resistance around 11200–11300. The 50-day simple moving average (SMA) marks resistance around 11180. The late May and early June highs marked resistance at 11300. And finally, the advance over the last few weeks retraced 50–62% of the May–June decline.

FIGURE 1: DJIA, DAILY. In addition to resistance, the stochastic oscillator became overbought with a move above 80.
Graphic provided by: MetaStock.
Graphic provided by: MS QuoteCenter.
In addition to resistance, the stochastic oscillator became overbought last week with a move above 80. Above 80 is considered overbought and below 20 is considered oversold. This overbought reading serves as a warning to bulls that the majority of the move may be over. It is not a bearish signal because the indicator remains above 80. Securities can become overbought and remain overbought. Note how the indicator remained largely above 80 for three weeks in late April and early May (gray box). I would look for a move back below 70 to trigger an early bearish signal.

About mid- to late June, the DJIA traced out a rising wedge pattern. These are typical for corrective rallies, and the evidence suggests that the rally may be nearing its end. Technically, the short-term trend is up as long as the wedge rises. Look for a break below the lower trendline and late June low to signal a continuation of the May–June decline. Conversely, look for a break above 11300 to signal a challenge to the May high.

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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