Retails Runs Into Resistance

06/15/04 01:35:15 PM

by Arthur Hill

The Retails HOLDRS (RTH) has been caught in an extended trading range, and its resolution could have broad implications for the overall market.

Security: RTH
Position: Hold

RTH bottomed in the spring of 2003 around 65 and advanced to the mid-90s by November 2002. Since peaking at 94.94 in early November, the stock has traded flat with support around 86 and resistance around 96. Resistance is marked by the Mar-04 high, while support is marked by the Dec-03 and May-04 lows.

Figure 1: Weekly chart of Retail HOLDRS RTH.

Graphic provided by: MetaStock.

There are two patterns at work here and both depend on a resistance or support breaks for confirmation. The first pattern is a large rectangle. Even though the stock broke above 95 in early March, it quickly fell back again, and resistance at 95 looks quite valid (red line). A move above 95 would break rectangle resistance and project further strength to around 104 (95 - 86 = 9; 95 + 9 = 104). Rectangles can go either way and a move below support at 86 would project a decline to around 77 (86 - 9 = 77).

Figure 2: Daily chart of RTH showing a head and shoulders formation.

By using the early March high at 96.15, the alternate pattern would be a head and shoulders. As with the rectangle, it is still a work in progress and dependant on a break for confirmation. The Nov-03 high at 94.94 forms the left shoulder, the high at 1-Mar of 96.15 forms the head, and the 9-Jun high at 94.72 forms the right shoulder. The pattern is far from confirmed as it would take a move below neckline support at 86 to be considered bearish. The downside projection would be to around 76 (96 - 86 = 10; 86 - 10 = 76).

Estimates are that retail spending drives two thirds of the economy. As this ETF shows, the group was strong in 2003, but has traded flat since November 2003. Has the consumer gone flat as well? An upside breakout would bode well for consumer spending, the economy and hence the stock market. However, a downside break would be most ominous and likely carry the broader market down. Until there is a definitive break, the stock remains in trend limbo.

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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Retails Runs Into Resistance

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