IBM Forms Yet Another Rising Flag

08/05/04 09:27:34 AM

by Arthur Hill

IBM remains in a downtrend punctuated by rising flags and the stock looks ripe for yet another continuation lower.

Security: IBM
Position: N/A

IBM led the overall market lower with a steady decline that began in mid-February. The decline was interspersed with a series of retracements that amounted to small corrective rallies or rising flags. The first flag retraced 38% of the prior decline, the second flag retraced 62% and the third flag has thus far retraced 50%. As this chart proves the rising flag is a bearish continuation pattern and that represents a reprieve in the ongoing trend.

Graphic provided by: MetaStock.

The current flag looks just as robust as the first two and RSI is turning bearish again. The 14-period RSI reached oversold (below 30) with each flag low and moved above 50 with each flag advance (gray arrows). It was possible to draw a trendline extending up from the RSI lows and look for a break to confirm a change in momentum. When RSI broke below the red trendline and below 50, momentum turned back to the bears and the stock continued lower. RSI generated a similar sell signal in early August.

A move below the lower flag trendline (85.3) would provide final confirmation and project further weakness to around 80. Flags are said to fly at half-mast and the decline extended from 91.21 to 83.42, a difference of 7.79. This implies that a continuation lower would result in a similar decline from the flag high (87.42 - 7.79 = 79.61). Traders should watch the flag high (87.4) and the trendline extending down from Feb-02 for signs to the contrary (i.e. bullish).

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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IBM Forms Yet Another Rising Flag

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