MMM Forms Bearish Flag

06/13/03 09:50:32 AM

by Arthur Hill

MMM confirms key support at 120 with another bounce and rising flag on low volume.

Security: MMM
Position: N/A

After failing to hold the resistance breakout at 131 (green arrow), MMM declined back to key support at 120 with a sharp decline on above average volume. The stock broke below the trendline extending up from Sep-01 for a few days, but support at 120 held for the fourth time in six months. A move below 120 would clearly turn the long-term trend bearish and argue for further weakness.

With the advance over the last few weeks, the stock retraced 50% of the prior decline and formed a rising flag. Flags are consolidations that typically move opposite the subsequent break. Bearish flags rise and a downside break is expected. Bullish flags decline and an upside break is expected.

Figure 1: Daily chart for MMM.

Graphic provided by: MetaStock.

Low volume reinforces the flag and the expectations are for a break below the lower trendline. Consolidations are resting periods before a continuation of the prior move. As such, volume usually declines and then increases on the continuation break. For MMM, volume peaked in early May (black arrow) and declined over the last few weeks as the stock advanced. Not only does this reflect weakness within the advance, but also confirm the rising flag. A move below 124 would signal a continuation of the prior decline (136 to 120) and project a support break at 120.

Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

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