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BOLLINGER BANDS


Merck Holds Firm In The Face Of Market Weakness

03/29/05 11:38:02 AM
by Arthur Hill

Merck is battling back with a triangle breakout and a consolidation near resistance.

Security:   MRK
Position:   Hold

After falling from the mid-40s to the mid-20s, Merck (MRK) managed to firm and form a large consolidation (blue trendlines). The stock traced out a triangle and broke above the upper trendline with a high-volume advance in late February. The trendline breakout is quite positive, but the stock met resistance just below 33 and must clear one more hurdle to complete the comeback.

Since breaking triangle resistance, the stock formed a tight pennant over the last five to six weeks. These are typically continuation patterns and the prior advance favors an upside breakout. A move above 33 would signal a continuation higher and project further strength to the upper 40s. Just as volume confirmed the late February 2005 breakout, traders should also look for a volume expansion to confirm a pennant breakout. (See Figure 1.)

Figure 1: MRK daily chart. The Bollinger Bands are currently their narrowest in months.
Graphic provided by: MetaStock.
Graphic provided by: Reuters Data.
 
The narrowing Bollinger Bands indicate that a move is likely sooner rather than later. Bollinger Bands represent volatility. As such, they contract when volatility decreases and expand when volatility increases. The Bollinger Bands are currently their narrowest in months and traders should prepare for a breakout.

Bollinger Bands do not provide an indication on the direction of the breakout, but relative strength suggests an upside breakout. The top indicator is the price relative, which compares the performance of MRK relative to the Standard & Poor's 500. The price relative bottomed in mid-November and recently broke above resistance in late March. This shows good relative strength and increases the odds of an upside breakout.



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.

Title: Editor
Company: TDTrader.com
Address: Willem Geetsstraat 17
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Website: www.tdtrader.com
E-mail address: arthurh@tdtrader.com

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