DOW STALLS NEAR TOP OF CHANNEL - BOLLINGER BAND WIDTH NARROWS FOR SPY - SMH SURGES BACK TO RESISTANCE - LRCX-SNDK-TSM LEAD SEMIS HIGHER - DOW TRANSPORTS CHALLENGES RESISTANCE - DJ TRUCKING INDEX SURGE - DJ AIRLINE INDEX LEADS TRANSPORTS HIGHER

DOW STALLS NEAR TOP OF CHANNEL... Link for todays video. The Dow Industrials stalled as the market traded with indecision on Wednesday. Chart 1 shows a clear uptrend over the last several months. A series of higher highs and higher lows formed since August. With this zigzag higher we can draw a rising price channel extending up from the August lows. The lower trendline, which was drawn first, has been touched four times. The upper trendline, which was drawn parallel, has now been touched three times. Since reaching the upper trendline in mid November, the Dow has traded rather flat by fluctuating around 10400. In the process, the Dow established support at 10200 and this is the first level to watch for signs of a pullback.

Chart 1

The bottom indicator window shows On Balance Volume (OBV) and the Accumulation Distribution Line. Both cumulative indicators are based on volume. OBV adds volume on up days and subtracts volume on down days. The Accumulation Distribution Line is based on a multiplier that is positive when the close is above the midpoint of the high-low range and negative when the close is below the midpoint. Since both are calculated differently, they can be used to confirm or refute a move. Both indicators are currently confirming strength in the Dow. OBV (red) hit a new high in mid November, while the Accumulation Distribution Line hit a new high this week. No real signs of weakness here.

THE THREE GAPS... Even though the S&P 500 ETF (SPY) gapped up three times in the last three weeks, trading has gotten quiet as the ETF fluctuates around 110. Chart 2 shows SPY unable to follow through on these gaps. One could consider the cup half-empty. On the other side, the ETF is holding the majority of its early November gains. This makes the cup half-full. Now I am sounding like an economist! Even with a pair of sharp pullbacks, SPY managed to hold above 109 on a closing basis. As far as I am concerned, the bulls remain in firm control as long as 109 holds. In other words, the cup is half-full right now. A close below 109 would provide the first sign of weakness that could signal a pullback.

Chart 2

The indicator window shows Bollinger Band Width (10,2). I shortened the moving average from 20 to 10 for increased sensitivity. Notice that moves below 4 show relatively tight trading. The indicator moved below 4 on November 20th and has remained below 4 the last seven trading days. Prior dips below this level foreshadowed small consolidations that led to short-term reversals. However, notice that these short-term reversals started with a long black candlestick. This suggests that we should wait for confirmation with a decisive down day before counting on a pullback.

SMH CHALLENGES RESISTANCE AGAIN... With a surge over the last three days, chart 3 shows the Semiconductors HOLDRS (SMH) challenging resistance around 26.5 for the umpteenth time since September. SMH first pierced the 26 level way back in late August. The ETF has since been trading flat with a resistance zone around 26-26.7. This consolidation looks like an inverse head-and-shoulders pattern, of the continuation variety. Yes, an inverse head-and-shoulders after an advance is considered a bullish continuation pattern. A break above the resistance zone would signal a continuation higher. For support, I would watch the late November lows. Failure to hold these lows would negate the head-and-shoulders pattern.

Chart 3

Within the semiconductor group, chart 4 shows Lam Research (LRCX) surging off support with good volume. Chart 5 shows Taiwan Semiconductor (TSM) breaking above wedge resistance with a big move over the last three days. Chart 6 shows Sandisk (SNDK) bouncing off support and breaking wedge resistance with good volume over the last two days.

Chart 4

Chart 5

Chart 6

TRUCKERS AND AIRLINES POWER TRANSPORTS ... Led by strength in trucking and airlines stocks, chart 7 shows the Dow Transports breaking above flag resistance to challenge its prior highs. First and foremost, the overall trend is up. After a 1000 point advance from early July to mid September, the Transports established resistance just above 4000. With a few bounces around 3600, a rather large trading range has taken shape the last few months. Todays flag breakout around 4000 reverses the two-week slide, but follow through is needed to exceed the prior highs.

Chart 7

Railroads powered Transports with a big surge on November 3rd, which was when Buffet announced his bid for Burlington Northern. Strength this week can be attributed to truckers and airlines. Chart 8 shows the DJ Trucking Index ($DJUSTK) surging above 310 over the last two days. Admittedly, this index has been quite volatile the last two months with a support break in October and sharp recovery in November. A higher low formed around 300 and the trendline breakout around 310 occurred with a pretty strong move. The bulls have the edge as long as support around 297-300 holds.

Chart 8

Chart 9 shows the DJ Airline Index ($DJUSAR) surging over 10% the last five days. Airlines were lagging the market in October, but returned to the leader board in November-December. Chart 10 shows UAL Corp (UAUA) holding support around 6.5 and surging with big volume the last three days. Chart 11 shows Continental Airlines (CAL) breaking out over the last three days. Chart 12 shows Delta Airlines (DAL) surging above 9 with big volume today.

Chart 9

Chart 10

Chart 11

Chart 12