|Figure 1: Weekly chart of DWH.|
|Graphic provided by: MetaStock.|
|Weakness in Microsoft and Intuit has weighed on the Software HOLDRS (SWH) over the last few weeks as the stock broke the lower trendline of the rising wedge. After a lower high, this trendline break could herald much lower prices with a continuation of the prior decline. Both the retracement amount (Fibonacci 61.8%) and the pattern (rising wedge) are classic for corrective rallies in larger downtrend. |
However, the trendline was the only real negative and the stock had yet to complete the trend change. Broken resistance at 34 (red arrows) turned into support with three bounces over the last six months (green arrows). It would take a move below this support level to break the prior low and confirm a downtrend with a lower low.
Figure 2: Weekly chart of SWH.
Taking a closer look at the most recent white candlestick, it is apparent that the stock forged a weekly outside reversal. There are two characteristics for an outside week. First, the low of the white candlestick is lower than the low of the prior candlestick (weekly). Second, the high of the white candlestick is above the high of the prior candlestick.
|Two items makes this pattern bullish. First, the short-term trend is down as the stock declined from 40 to 34.5 over the last 10-weeks. Bullish reversals require existing downtrends to actually reverse. Bullish reversals in uptrends are simply impossible. Second, the close of the white candlestick is above the prior close. This bullish outside reversal reinforces support and argues for higher prices over the next few weeks. In addition, reinforced support provides a key level to watch (support at 34.5) for a major trend change.|
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