Volume And Momentum Turn Sour On Best Buy

01/28/05 07:52:29 AM

by Arthur Hill

Best Buy spearheaded the retail group, rising from mid-August to early November, but waning momentum and increasing volume on the downside may spell trouble ahead.

Security: BBY
Position: Sell

Best Buy led the retail group higher from mid-August to early November, but waning momentum and increasing volume on the downside could spell trouble ahead. First, let's look at the August-November advance. The stock formed a morning doji star (green oval) and then advanced from ~44 to ~62 in 13 weeks. Not a bad run at all. Volume was high when the advance began, but enthusiasm waned as the stock broke above 54. The black vertical lines show the second portion of the advance. The green volume bars (up weeks) were high in August and early September, but much lower from late September to early October (gray arrow). Buying pressure clearly waned as price appreciated.

Not only was volume waning, but momentum also slowed. The top indicator is moving average convergence/divergence (MACD) on a weekly basis. Even though the 13-week advance was certainly sharp, MACD did not even come close to its December 2004 high. Momentum just ain't what it used to be, and the recent signal line crossover is negative. Further weakness into negative territory would be outright bearish.

Figure 1: Best Buy. During the August-November advance, the stock formed a morning doji star (green oval) and then advanced from ~44 to ~62 in 13 weeks. Volume was high when the advance began, but enthusiasm waned as the stock broke above 54. The black vertical lines show the second portion of the advance. The green volume bars (up weeks) were high in August and early September, but much lower from late September to early October (gray arrow). Buying pressure clearly waned as price appreciated.

Graphic provided by: MetaStock.

Graphic provided by: Reuters Data.

As a technical analyst, I must admit that the current decline looks like a falling flag (magenta trendlines)(Figure 1). These are typical correction patterns that are resolved with the continuation of the prior move, which was up.

However, there are some glaring problems with volume in this "corrective pattern." First, volume is supposed to be relatively low during a correction. Second, volume on the declines has been rather strong (blue arrows) as three of the red bars are clearly above average. Third, volume on the advances has been weak as the green volume bars are consistently below average.

As long as the flag falls, the stock merits a bearish bias. These volume patterns show lots of selling pressure and decrease the chances of an upside breakout. Current expectations are for a move toward key support at 44. Should the stock firm AND break above the early January high on good volume, expectations would be dashed, the flag would be validated, and further strength expected.

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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Volume And Momentum Turn Sour On Best Buy

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