Don't Ignore This Chart!

An Island Reversal for DIA


With a gap and big surge, the Dow Diamonds (DIA) triggered a series of bullish signals that remain valid until proven otherwise. First, let's look at the bullish signals. DIA bounced off support in the 174-175 area in early July and broke resistance with a surge above 178. Also notice that an island reversal formed as DIA gapped below 178.2 on 29-Jun and then gapped above this level on 13-Jul. The resulting gaps created an island where bears (short-sellers) are trapped with losses. Momentum also turned bullish as MACD moved above its signal line and turned positive. 

Click this image for a live chart

So what would it take to prove these bullish signals otherwise? First and foremost, the gap and breakout are bullish as long as they hold. A close below 177 would fill this gap and negate the breakout. Such a failure would call for a reassessment. Second, momentum has a clear upward bias as long as MACD remains positive. A MACD cross into negative territory would be bearish. Note that I am not worried about low volume because volume is supposed to be low in summer. Price action is first and foremost, and the gap is bullish until proven otherwise.  

Arthur Hill
About the author: , CMT, is the Chief Technical Strategist at Focusing predominantly on US equities and ETFs, his systematic approach of identifying trend, finding signals within the trend, and setting key price levels has made him an esteemed market technician. Arthur has written articles for numerous financial publications including Barrons and Stocks & Commodities Magazine. In addition to his Chartered Market Technician (CMT) designation, he holds an MBA from the Cass Business School at City University in London. Learn More
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