Lilly Runs Into Resistance Zone

07/08/04 08:05:22 AM

by Arthur Hill

Eli Lilly (LLY) has steadily advanced over the last two years, but the past could soon haunt the stock as support from a prior pattern turns into resistance.

Security: LLY
Position: Hold

On the weekly chart, LLY formed a large symmetrical triangle from Sep-00 to Apr-02 and broke support around 72 to usher in a sharp decline. The last eight months of this consolidation featured a trading range with support in the low 70s and resistance in the mid-80s (red rectangle). This zone acted as support in 2001 and 2002, but turned into resistance as of Dec-04.

Figure 1: Weekly chart of Eli Lilly.

Graphic provided by: MetaStock.

In addition to resistance from the red rectangle, the stock retraced around 50% of its prior decline (109 to 43.75) and the pattern looks like a rising wedge. Both are typical for corrective advances. Notice that the upper trendline marks resistance extending to the upper 70s and the lower trendline marks support extending to the upper 60s. A move below the lower trendline would be the first bearish signal on the price chart.

Figure 2: Close-up of LLY's weekly chart.

A close-up of the weekly chart reveals signs of weakness. First, the stock formed a weekly bearish engulfing (red arrow) that was confirmed with a high volume decline (blue arrow). Second, MACD peaked in early January and formed lower highs over the last few months. These lower highs in the face of higher highs by the stock form a bearish divergence (red line) that was confirmed by a signal line crossover in June. The bearish evidence is clearly stacking up and the final straw would be break below the Mar-04 low at 64.51.

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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Lilly Runs Into Resistance Zone

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