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A Double Head And Shoulders For Bombardier?

01/16/04 07:58:02 AM
by Koos van der Merwe

Bombardier, Inc. is a manufacturer of business jets, regional aircraft, rail transportation equipment and motorized recreational products. In Canada it is considered a blue chip company, but since 911 it has fallen on hard times as the purchase of aircraft worldwide fell.

Security:   BBD'B - T
Position:   Sell

Paul Tellier was appointed as CEO to lead the company back to "magnificence." What he has achieved is remarkable in the face of world terrorism and competition from other airplane manufacturers, but even he, with his excellent corporate management record, is finding the road ahead tough. The chart below is not a pretty picture and suggests more downside for the company.

A double head and shoulders pattern.
Looking at the chart, Bombardier's price moved up on good volume from the low of $2.56 it reached in March 2003. On October 14 it peaked on falling volume and then formed the right shoulder of a small head and shoulders pattern on even less volume.

A head and shoulders pattern is generally regarded as a reversal pattern. The price begins to slow down and the forces of supply and demand are considered to be in balance. Sellers come in at the highs, forming the left shoulder, and the downside is probed at the beginning of the neckline. Buyers soon return to the market and ultimately push through to new highs, forming the head on falling volume -- a sign of weakness. The new highs are quickly turned back and the downside is tested again forming the right shoulder on even less volume, with prices continuing on down to neckline. The point where the neckline is penetrated can be used to calculate a possible downside target.

Volume plays an important part in this pattern and is generally higher on the left shoulder than the right shoulder. In the chart, volume on the two left shoulders is far higher than the volume at the head and the two right shoulders. The smaller head and single shoulder pattern gives a target of $4.48 which has not yet been reached. The price found strong support at the neckline of the larger head and double shoulders pattern at $4.89. The price then recovered on even less volume to form the right shoulder of the pattern.

Should the price now break below the neckline of the larger pattern at $4.96, I would expect it to fall further to $3.18. Not a happy event -- I would sell Bombardier at these levels.

Koos van der Merwe

Has been a technical analyst since 1969, and has worked as a futures and options trader with First Financial Futures in Johannesburg, South Africa.

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