The decline in the Dow Industrials over the last few weeks looks like a bull flag. This downward sloping flag is a potentially bullish pattern that requires confirmation with an upside breakout. Notice that the Dow formed a similar falling flag in late February and early March. The breakout at 11100 in early March confirmed this flag and led to a new reaction high. For the current flag, a break above 11250 would confirm the pattern and signal a continuation higher. The upside target would be the upper channel trendline or to the 11500-11600 area.
In addition to the flag, the Dow is trading at trendline support and the Ratio-Adjusted McClellan Oscillator is oversold. The Dow firmed over the last two days near support from the October trendline. This trendline has now been touched four times and a break would be quite negative. As long as this trendline holds, the trend since October is clearly up. The McClellan Oscillator dipped below –70 for the third time in five months. The prior oversold dips in December and January led to impressive bounces. The combination of trendline support and an oversold McClellan Oscillator increases the odds of a bounce as we head into earnings season.
