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Dow Industrials

rose 1,755 points between March and last week's rally high. Last week's three-day selloff shaved almost 25% off this impressive number before Friday's strong reversal kicked into gear. That bounce started just north of the 50-day moving average, suggesting the index will stay above recent lows for the next few weeks, at least.

The relative strength of both the Dow and the

S&P 500

continues to fall, despite the bounce, predicting the next leg in a significant topping pattern. But it's not clear what might happen after that. The markets could drop into a shallow retracement and then run back to new highs, or enter a steep correction that rivals the 2006 summer market.



averages fared better than the blue-chips during last week's rout, holding within broad congestion while the S&P 500 tagged six-week lows. But this outperformance is misleading, given that four-letter stocks had just failed repeated attempts to take over market leadership near the multiyear highs.

Selling pressure was broad and deep during the downturn, with few sectors moving against the southerly tide. This makes it tougher, but not impossible, to find good recovery candidates this week. My plan is to trade these "buy the dip" patterns until the broad market confirms my bearish bias or starts another run back to the highs.

On the flip side, I won't be joining the short side anytime soon. All major indices are still trading well above their 50-day and 200-day moving averages. This places them firmly into ongoing bull markets. As short-sellers have discovered repeatedly in 2007, this core strength can trigger vertical squeezes that pilfer their profits faster than lightning.

Given the Dow's broad leadership since March, it makes sense to look for bounce plays within its 30 blue-chip constituents. Sure enough, my weekend review turned up four index components that could yield recovery profits in the weeks ahead.


(HON) - Get Report

gapped above two-month resistance in April and ran higher in a strong rally that stalled out just below $60. Price then dropped into a triangle pattern, with support between $55 and $56. Notably, the stock held above two-week support during last week's downturn. So far this looks like a healthy consolidation ahead of another rally leg.

The stock topped out ahead of other Dow components, so there's a good chance it will recover to new highs more quickly once the index finds its footing. But it's best to remain on the sidelines until price action clears the monthlong triangle pattern. In this regard, a run over short-term resistance at $59 should set a new uptrend into motion.


(BA) - Get Report

ran up to an all-time high at $89.85 last November and dropped into a broad sideways pattern. It rallied through resistance on high volume in April and wound higher in a slow uptrend that picked up steam about four weeks ago. Price then ran up to $102 and pulled back sharply with the broad market.

Round-number resistance can take time to overcome, but the stock is already setting up a return to this key level. Friday's upside reversal at the 20-day simple moving average exhibited wide range and healthy participation. This predicts a continued recovery and a run back to the recent high. Expiration magnetism this week could also support a bounce into the triple digits.

United Technologies

rallied to an all-time high of $69.49 in February and dropped sharply during the Asia-driven selloff that month. It found support at its 200-day moving average in early April and started a slow recovery. The stock broke out above the old high in May after hovering near resistance for two weeks.

The new uptrend topped out at $71.62 just a few days later, with the stock pulling back with the Dow throughout last week's volatility. Price broke breakout support Thursday but jumped back above that level on Friday. This "failure of a failure" issued a buy signal that predicts a test of the rally high and possible follow-through into the mid-$70s.

Consider what


happen with


(HPQ) - Get Report

last week. It didn't sell off hard, like most index components. It didn't break any support levels, and its relative strength readings didn't turn downward. In sum, this stock acted much better than the Dow during the nose dive, so it should outperform by a wide margin during a recovery.

The short-term chart shows a complicated jumble of price bars after the stock gapped higher on May 8. To overcome this noise, focus your attention on the two recent highs near $46. A rally over this resistance level should trigger the next leg of the strong uptrend. The longer-term view predicts that rally could reach up to $50.

At the time of publication, Farley had no positions in any of the stocks mentioned in this column, 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, 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;

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