Lehman Brothers Holding: Nearing Retracement and Getting Overbought

09/26/03 12:59:07 PM

by Arthur Hill

With a decline from 76 to 60, Lehman Brothers Holding (LEH) had a bad summer, but appears to be making up lost ground with an autumn advance. However, this advance looks like a rising wedge and its RSI has reached 70.

Security: LEH
Position: N/A

After a 16-point decline from mid-June to early August, LEH became oversold as RSI dipped below 30. The stock reversed in early August and retraced about 62% of the prior decline (76 to 60) with an advance to around 71. RSI moved from oversold (below 30) to overbought (70) in less than two months. In addition to becoming overbought, the pattern at work appears to be a rising wedge. Both the pattern and the retracement are classic for reaction rallies or corrective moves.

Volume expanded on the decline, but was below average most of the advance. The red horizontal line shows volume during the decline (mid-June to early August). Most of the days saw above average volume as selling pressure was intense. In contrast, the green horizontal line shows volume during the advance (early August to late September). Except for a few days at the beginning and two days at the end, volume during the bulk of the advance was below average. Low volume is expected in August, but volume was hardly impressive in September. Sustainable advances require expanding volume and this rally may have weak legs.

Graphic provided by: MetaStock.

Regardless of volume, it is important to respect the wedge as long as it rises. Volume did pick up on September 18 and again on September 23, but the stock remains stymied at 71. As long as the lower trendline holds, the trend is firmly bullish. A move below the lower trendline would be the first sign of trouble and further weakness below resistance-turned-support at 66 would be bearish. Traders may also turn to MACD for signs of verification. A trendline break could be confirmed with a MACD move below its signal line.

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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