3M Is Starting To Stall

01/06/05 03:13:17 PM

by Arthur Hill

3M has been a top performer over the last four years, but low volume and a potential bearish reversal pattern could end that streak.

Security: MMM
Position: Hold

First and foremost, 3M has been in a major uptrend for more than 15 years. Yes, 15 years. The stock is still holding above the trendline extending up from October 1987, which begins around 13.50. Even a decline back to 60-65 would keep the stock above this long-term trendline. What's more, 3M was completely immune to the bear market that raged from March 2000 to October 2002.

Since moving above 80, the stock has started to trade sideways and a head and shoulders reversal may be taking shape. The stock already broke below the trendline extending up from September 2001, and the right shoulder could be taking shape. The shoulder would be completed with a move to 75 and the head and shoulders pattern would be confirmed with a move below 75, which marks neckline support. Such a break would project a move to around 60-65, and this support zone confirmed by prior resistance.

Figure 1: 3M weekly. Even though signs of increased selling pressure are starting to appear, it ain't broken until it's broken.

Graphic provided by: MetaStock.

Graphic provided by: Reuters Data.

Volume plays an important role in confirming a head-and-shoulders pattern. Volume was relatively high from September 2001 to September 2003, which was when the stock forged most of its gains. The rally to 90 in 2004 formed the head and occurred on relatively low volume (green arrows). This shows waning buying pressure. In addition, the decline from 90 to 75 occurred with two volume spikes (red arrows). This shows increased selling pressure on the downside. Looking at the last three months, volume has picked up again on the upside.

Even though signs of increased selling pressure are starting to appear, it ain't broken until it's broken. As long as 75 holds, this large head and shoulders formation is unconfirmed, and it would be wise to respect the bulls. As a key component in the Dow Jones Industrial Average, MMM will play an important part in the performance of this average.

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

3M Is Starting To Stall

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