FedEx Drags Transports Lower

04/11/05 08:41:11 AM

by Arthur Hill

Volume is expanding as FDX declines and a bearish reversal pattern is taking shape.

Security: FDX
Position: Hold

I wrote about a potential bullish setup in the Dow transports in early April, but this pattern (falling flag) was never confirmed with an upside breakout. Instead, the Dow transports broke an important support level, and part of the blame goes to key component FedEx (FDX). There are a number of negative developments, and further weakness would confirm a large double top to complete a significant bearish reversal.

The double top is a bearish reversal pattern that shows distribution as the pattern unfolds and a trend changes as the pattern is confirmed. The stock met resistance around 100 twice and established support around 90 with a reaction low in January. This makes the pattern a large trading range, but expanding volume on the declines shows distribution. A move below 89 would confirm the double top and turn this distribution into a downtrend.

Figure 1: FedEx. The ultimate oscillator (14,28,56) confirms weakness. The oscillator trended higher and remained above 50 most of 2004. This coincided with an advance in the stock. The big change came in January when the indicator moved well below 50 (red arrow).

Graphic provided by: MetaStock.

Graphic provided by: Reuters Data.

The ultimate oscillator (14,28,56) confirms weakness (Figure 1). Trader Larry Williams developed this indicator, and it is based on three time frames (14-day, 28-day, and 56-day frames are used in this example). The oscillator trended higher and remained above 50 most of 2004 (green trendlines). This coincided with an advance in the stock. The big change came in January when the indicator broke the green trendline and moved well below 50 (red arrow). The overall bias is not down and the red trendline should now act as resistance.

The downside target is around 75-80. A break below 89 would confirm the double top and project further weakness to 79 (101 - 90 = 11, 90 - 11 = 79). This target is confirmed by the magenta trendline extending up from September 2001 to around 80. In addition, there is support from broken resistance around 76.

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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