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HEAD & SHOULDERS


When GE Bottoms Out, It Bodes Well For The Market

01/22/04 11:52:38 AM
by Ashwani Gujral

GE broke out of weekly head and shoulders pattern and is now heading towards $44. When GE, a heavyweight on market indexes, bottoms out and breaks out into a new 52-week high, the entire market is strengthened.

Security:   GE
Position:   Buy

It takes a lot to move a market heavyweight like GE to new 52-week highs. A move like that indicates the market is likely to have legs as a stock like GE can pull up several stocks and sectors with it. As GE bottoms out, so does, at the very least, the U.S. manufacturing sector. GE has formed a large weekly head and shoulders basing pattern over the last one and a half years, and on January 17, 2004 closed at a 52-week high.

Figure 1: GE daily chart.
Graphic provided by: Stockcharts.com.
 
On the daily chart, GE has broken out from the key level of $32.2 on very heavy volume. I always like breakouts on heavier than avgerage volume, as this diminishes the chances of false breakout. The ADX is less than 30, showing the uptrend is still strong. MACD was flattish until now, but is ready to move up as a consolidation ends. GE has been moving up after consolidating and completing flag patterns every few days. One of my favorite entry techniques is to wait for a flag pattern and trade the breakout. Flags generally occur in the middle of moves and provide excellent targets and stop-losses.


Figure 2: Weekly chart of GE.

Stocks moving out of long basing patterns on heavy volume often provide trending moves to the upside. On the weekly chart, GE has had a head and shoulders breakout on very heavy volume. It has a target of $44. The target can be calculated by measuring the depth of the head from the neckline and adding it to the neckline. The RSI has shifted range from bearish to bullish. The ADX is ready to rise above 20 which indicates a strengthening uptrend.

To summarize, a market heavyweight like GE can lift the sentiment of the market index and provide key support. It is also a proxy for several sectors and the manufacturing economy.



Ashwani Gujral

He is founder of AGIP Securities Pvt. Ltd. which offers money management services, live chat rooms (during market hours) and independent technical analysis consultancy. The company has a big media presence from the likes of CNBC, NDTV Profit, and ZEE Business.

Title: Chief mkt strategist
Company: AGIP Securities
India
Phone # for sales: 9871066337
Website: www.ashwanigujral.com
E-mail address: contact@ashwanigujral.com

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