Looking for Clues to Dow's Next Move

The Dow Jones Industrial Average is up more than 5% so far in 2006, but it's still been a rocky road for the venerable index.

Volatile swings have made it tough to profit from this year's uptick, unless you tossed the Dow Diamond Trust (DIA - commentary - Cramer's Take) into an account at the start of the year and then forgot it was there.

I noted in February that the index was traveling over familiar territory.

In fact, it's rallied above 11,000 more than a dozen times in the last seven years.

Unfortunately, each trip into this price zone has signaled a major reversal.

We last saw the power of this long-term barrier when the Dow turned south off the May high at 11,670. (See first chart below.)

Is the Dow getting any closer to breaking through this multiyear resistance?

The monthly chart shows little evidence that this welcome event is any nearer than it was in 1999.

At first, the index will need to hold above 11,000 long enough to convince die-hard sellers that component prices are sitting at a floor rather than an impenetrable ceiling.

The only encouraging sign on this monthly chart lies in the clustering bars over the last two years. Swing movement has narrowed considerably relative to the price action in the five years preceding it. In particular, the Dow has been trading in a relatively tight range above the 10,000 "psychological" level. This might represent the first phase of an eventual breakout, but there's no way of telling right now.

Zooming in to the daily view, we see a pattern that's quite similar to that of the S&P 500 index. The Dow traded well in the first quarter, and hit nominal new highs before rolling over into a second-quarter selloff. Its position right now shows decent buying interest off the August low at 11,040. This suggests the current rally will continue to the May high of 11,670.

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At the time of publication, Farley had no positions in the stocks mentioned, although holdings can change at any time.

Alan Farley is a professional trader and author of The Master Swing Trader. Farley also runs a Web site called HardRightEdge.com, an online resource for trading education, technical analysis and short-term investment strategies. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Farley appreciates your feedback; click here to send him an email. Also, click here to sign up for Farley's premium subscription product The Daily Swing Trade brought to you exclusively by TheStreet.com.

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