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AMEX Diamonds Trapped In Trading Range

11/06/08 09:44:00 AM
by Alan R. Northam

DIA is currently trapped in a trading range and a breakout either to the upside or downside is required to determine the future direction of this market. However, the higher probability is for a breakout to the downside and a continuation of the down trend.

Security:   DIA
Position:   N/A

Figure 1 shows the daily bar chart of the exchange traded fund (ETF) that mimics the Dow Jones Industrial Average (DIA). This chart plots the daily price bars, 200-day simple moving average, 50-day simple moving average, Fibonacci retracement levels, and volume. This chart shows that DIA continues to trade below the 200-day moving average, indicating that this market is still in a long-term downtrend. This chart also shows the market trading below the 50-day moving average, indicating that the market is still trading in an intermediate-term downtrend. With this market still established in a downtrend, any and all upward market rallies are considered countertrend or corrective.

FIGURE 1: DIA, DAILY. This chart shows DIA trapped in a trading range bounded by the upper resistance zone and the lower support zone.
Graphic provided by:
On October 10, DIA made a market low at 78.80 marked with an upward-pointing arrow. From this market low, DIA traded higher for two sessions, peaking at 98.63, and it is marked with a downward-pointing arrow. These two arrows mark areas of support and resistance, respectively. Following this market peak, DIA traded lower for two more sessions before turning upward again. This low is marked by the second upward-pointing arrow. DIA then went on to form another lower peak two days later and is marked by the second downward-pointing arrow. The two upward-pointing arrows mark the boundary of the support zone and the two downward-pointing arrows market the boundary of the resistance zone.

Since the formation of the lower support zone and the upper resistance zone, DIA traded downward into the lower support zone and turned back upward, indicating a strong support zone. The market then turned back upward and traded into the overhead resistance zone then turned back downward, also indicating a strong overhead resistance zone. Both the support zone and the resistance zone appear to be quite strong and could be indicating a high probability that DIA is trapped in trading in a range between these two boundaries. In addition, note that the resistance zone boundaries align quite nicely with the 38.2% and 50% Fibonacci retracement levels, which has evidently defined these boundaries.

Below the price chart I have shown the daily volume bars. The volume chart shows that volume has been decreasing while price has been increasing since October 10. This divergence between price and volume is bearish and signals that the market action since October 10 is corrective and not the start of a new upward trend.

In conclusion, DIA appears to be trapped within a trading range bounded by the upper resistance zone and the lower support zone. As a result of this trading range, the market is expected to continue to trade within this range until a breakout occurs. A breakout above the resistance zone will signal a deeper market correction and could even threaten the bear market downtrend. However, a breakout below the support zone will signal the continuation of the downward trend. Determining if DIA will break out to the upside or the downside is based upon probabilities. There exists a higher probability for DIA to break out to the downside than to the upside as this market is still in both an intermediate-term and long-term downward trend until proven otherwise. Look for the breakout to verify the future direction of DIA.

Alan R. Northam

Alan Northam lives in the Dallas, Texas area and as an electronic engineer gave him an analytical mind from which he has developed a thorough knowledge of stock market technical analysis. His abilities to analyze the future direction of the stock market has allowed him to successfully trade of his own portfolio over the last 30 years. Mr. Northam is now retired and trading the stock market full time. You can reach him at or by visiting his website at You can also follow him on Twitter @TradersClassrm.

Garland, Tx
E-mail address:

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Date: 11/07/08Rank: 5Comment: 

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