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HEAD & SHOULDERS


3M Teeters On The Edge Of The Abyss

04/28/05 07:59:56 AM
by Arthur Hill

3M led the way lower in April, and further weakness would confirm a large bearish pattern that has been working since November.

Security:   MMM
Position:   Hold

3M led the way lower in April, and further weakness would confirm a large bearish pattern that has been working since November. A head & shoulders reversal formed on the weekly chart from November 2003 to April 2005 (Figure 1). This pattern represents a massive distribution and would be confirmed with a move below neckline support (75). The left shoulder formed in January 2004, the head in July 2004, and the right shoulder in March 2005. The decline from July 2004 broke the trendline extending up from September 2001, and this shows a loss of upside momentum.

Waning momentum is also confirmed by the moving average convergence/divergence (MACD). MMM recorded a higher high in July 2004, but MACD formed a lower high and a large negative divergence (red line). MACD then moved into negative territory and to its lowest level since November 2001. The right shoulder produced a bounce in momentum, but MACD formed another lower high and recently moved into negative territory. Momentum is clearly bearish and is now moving lower to get even more bearish.

Figure 1: MMM. A head & shoulders reversal formed on the weekly chart from November 2003 to April 2005.
Graphic provided by: MetaStock.
Graphic provided by: Reuters Data.
 
The downside target is to around 60-65. This is dependent on head & shoulders confirmation with a key support break at 75. A number of technical studies confirm the target. First, the prior resistance zone turns into a support zone around 60-65. Second, a 50-62% retracement of the entire prior advance would extend to 61-67. Third, the head & shoulders target is to around 60 (90 - 75 = 15, 75 - 15 = 60).



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
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