Rowan Returns To Resistance Breakout

05/10/05 03:20:43 PM

by Arthur Hill

Despite a sharp decline over the last two months, the decline in Rowan Cos. looks like a normal correction.

Security: RDC
Position: Accumulate

First and foremost, the big trend for Rowan Companies (RDC) is up. The stock met resistance around 26 at least four times over the last two years and broke free with a big move earlier this year. The advance propelled RDC to new 52-week highs and established a long-term uptrend. See Figure 1.

With the long-term trend up, declines are viewed as corrections and support zones can by used to anticipate bullish reversals. There is clearly a support zone around 26 and this is confirmed by four items. First, broken resistance turns into support. This is a key tenet of technical analysis and the stock is already showing signs of firmness in early May. Second, the trendline extending up from May 2004 has been touched three times and extends to around 26 in early May 2005. Third, the recent decline to 26 retraced 50-62% of the prior advance (20.44 to 33.04), and this is normal for a retracement.

Figure 1: Rowan. RDC met resistance around 26 at least four times over the last two years and broke free with a big move earlier this year.

Graphic provided by: MetaStock.

Graphic provided by: Reuters Data.

The fourth support factor is based on an indicator. Even though the relative strength index (RSI) is a momentum oscillator that is typically used to identify overbought and oversold levels, it can also be used to follow the trend. A strong trend features a strong RSI, usually one that does not dip below 40. Therefore, a decline into the 40-50 zone represents potential support and a possible reversal point (green rectangle). The RSI is currently trading at 48 and firming within this support zone. A move above the mid-April high (52) would turn the indicator up and argue for a renewed advance in RDC.

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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Rowan Returns To Resistance Breakout

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