Lexmark Starts Losing the Plot

07/01/03 10:47:18 AM

by Arthur Hill

Lexmark (LXK) has been a stellar performer over the last few months, but a series of bearish divergences in a number of indicators suggests that a top is near.

Security: LXK
Position: Sell

One bearish divergence in one indicator would not be cause for concern, but a bearish divergence in three different indicators is cause for concern. Mulicolinearity refers to the practice of avoiding indicators that provide essentially the same information or are highly correlated. RSI, MACD, stochastics and rate-of-change are all momentum indicators that are highly correlated. When one advances, the others are never far behind. Using non-correlated indicators avoids this problem, helps confirm divergences, and reinforces the signals.

Figure 1: Daily chart for Lexmark (LXK)

Graphic provided by: MetaStock.

For LXK, three indicators have been chosen: MACD for momentum; on balance volume (OBV) for money flows; and the "price relative" to gauge relative strength. LXK moved above 77 twice in the last two months, but all three indicators peaked in May and formed lower highs in June. The red lines and red arrows mark these bearish divergences. The inability of these indicators to return to their prior highs, as did the stock, reflects less strength in the second advance than in the first advance. Less strength is often the first sign of trouble.

The advance in LXK back to resistance around 77 was not confirmed by any of these indicators and this reinforces the potential for a double top. Technically, a double top would not be confirmed unless the stock declines below 69 and breaks key support. A move below this level would project a decline to around 60 (77.5 - 69 = 8.5, 69 - 8.5 = 60.5). Also notice that upside volume was low in June and the stock had already broken below the trendline extending up from Sep-00.

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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Lexmark Starts Losing the Plot

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