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WEDGE FORMATIONS


Two Bearish Patterns for Software HOLDRS

05/13/04 09:05:39 AM
by Arthur Hill

Two bearish patterns are taking shape in the Software HOLDRS (SWH) and these point to much lower prices over the next few months.

Security:   Software HOLDRS
Position:   Sell


Figure 1: Weekly chart of Software HOLDRS.

On the weekly chart, the Software HOLDRS (SWH) formed a large rising wedge over the last 18 months. The advance from 20.08 to 40.2 seems quite large and bullish enough on its own, but a look at the prior decline shows this to be a mere retracement. In fact, the advance retraced a Fibonacci 61.8% of the prior advance and broke trendline support earlier this year.

Figure 2: Daily chart of Software HOLDRS.
Graphic provided by: MetaStock.
 
To makes matters even more bearish, a head-and-shoulders reversal is taking shape on the daily chart. The left shoulder formed from September to October, the head peaked in January and the right shoulder evolved over the last two months. Neckline support resides at 33.5 and a break below this level would project further weakness to around 27 (40.2 - 33.5 = 6.7, 33.5 - 6.7 = 26.8).

The head-and-shoulders reversal is a large bearish pattern, but the rising wedge points to an even bigger decline. As a continuation of the prior decline (50.91 to 20.08), a move below the October 2002 low would be expected. With Microsoft, Adobe, Intuit and Oracle featuring in this ETF, a sharp decline would no doubt weigh on the Nasdaq.



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.

Title: Editor
Company: TDTrader.com
Address: Willem Geetsstraat 17
Mechelen, B2800
Phone # for sales: 3215345465
Website: www.tdtrader.com
E-mail address: arthurh@tdtrader.com

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