FedEx Fallout

12/18/03 11:42:37 AM

by David Penn

A bearish divergence then, an island gap now ... FedEx looks lower.

Security: FDX
Position: N/A

In a recent Traders.com Advantage article ("Dow 3000," December 4, 2003), I attempted to draw attention to the Dow Transports' need to confirm the new highs made by the Dow Industrials. That the Transports have struggled to do so (see my upcoming "Transport Trouble" for Traders.com Advantage) is all too apparent, and does not bode well for the broader stock market.

The trade in FedEx, a component of the Dow Transports, has exemplified the problem the Transports have endured in the past few months. Note first the bearish divergence between the stochastic oscillator (7, 10) and the October and November highs in FedEx. The stochastic is slightly higher at the October high than it is at the November high. Yet in terms of price action, FedEx's October high is significantly lower than its November high. This is a classic bearish divergence between an oscillator and price action, the result of which was the sharp decline that hit FedEx in mid-November, as its share price dropped from the November high of 77.50 to as low as 70.00.

Following the sharp sell-off in mid-November, FDX finds support at 70.

Graphic provided by: eSignal.

Shares of FedEx rallied in post-Thanksgiving trade into December, rising above the 50-day exponential moving average. In fact, a test of support at the 50-day EMA near the middle of the month led to another push upward for the stock, which reached an intraday high above 75.00. However, this rally was short-lived as FedEx again gapped down beneath the 50-day EMA.

The gaps in late November and again in mid to late December have formed an island on FedEx's price chart. The question at this point is whether or not this island will represent an island reversal or merely an island gap from which further price declines can be expected.

Most alarming for those who are inclined to pursue the bullish case for FedEx is the fact that the market for FedEx still seems quite overbought. When FedEx last tested support at 70, the market was sufficiently oversold that the stock bounced 5 points. However, the most recent test of support at 70 revealed a market that, at 70, was still overbought.

The intermediate trend for FedEx is up. So there should be little rush to adopt the bearish case. But the combination of weakness in the Dow Transports, bearish gaps (the first on exceptionally high volume), and an overbought market seem to argue against the attractiveness of FedEx right now.

David Penn

Technical Writer for Technical Analysis of STOCKS & COMMODITIES magazine, Working-Money.com, and Traders.com Advantage.

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GAPS

FedEx Fallout

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