State Street Forms Large Head And Shoulders Reversal

04/16/04 09:16:57 AM

by Arthur Hill

With the prospects of higher interest rates on the horizon, key banking stocks like State Street (STT) could come under selling pressure.

Security: SST
Position: Hold

While this fundamental argument makes sense and is good dinner party chatter, the price chart holds the true key and State Street (STT) is forming a large head and shoulders reversal. The stock has been trading flat since mid-October as this distribution pattern strings out. The left shoulder formed in October/November, the head in January and the right shoulder is currently under construction.

Figure 1: Daily chart of State Street.

Graphic provided by: MetaStock.

Keep in mind that a head and shoulders pattern is only a "potential" reversal pattern until confirmed. Neckline support extends from the November and March lows to mark support around 49. A close below 49 would confirm the pattern and project further weakness to around 41 (57 - 49 = 8, 49 - 8 = 41). As long as neckline support holds, the stock remains in a trading range at worst.

Figure 2: Larger view of the head and shoulder formation on State Street's daily chart.

A move above 55 would negate the prospects of a head and shoulders reversal. The stock met resistance between 54 and 55 three times in the last three months. The most recent attempt to break above 55 was repelled with a long black candlestick on the highest volume since mid-January (Figure 1, red arrows). A recovery from such selling pressure AND a move above 55 would be most bullish and suggest further upside.

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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HEAD & SHOULDERS

State Street Forms Large Head And Shoulders Reversal

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