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WEDGE FORMATIONS


The Dreaded Wedge Appears In Hewlett-Packard

05/12/05 07:45:58 AM
by Arthur Hill

Shares of Hewlett-Packard have enjoyed a nice advance since August, but the move appears to be nearing its end as momentum wanes.

Security:   HPQ
Position:   Sell

On the weekly chart (Figure 1), the pattern and the retracement are classic. After a sharp decline, the stock retraced 62% with an advance just above 22. This is a normal retracement for a corrective rally. In addition, the pattern looks like a rising wedge, which is a bearish corrective pattern. In other words, the current advance runs counter to the larger trend and is expected to fail.

Figure 1: HPQ. The current advance runs counter to the larger trend and is expected to fail.
Graphic provided by: MetaStock.
Graphic provided by: Reuters Data.
 
As the stock tested resistance around 22 in January and April, the weekly stochastic oscillator formed a noticeable negative divergence. The indicator moved to overbought in December (above 80) and formed a lower high in January. The April high exceeded the January high, but fell well short of the December high, and the negative divergence still looms (red trendlines). The inability to make it back above 80 shows less upside momentum and increases the chances of a bearish reversal.

The March low holds the key. With two relatively equal peaks in January and April, a small double top has evolved. The March low sits in between and marks key support at 19.5. A move below this level would break the rising wedge and prior low to turn the trend bearish. The downside target would be the August low around 16.



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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Date: 05/12/05Rank: 4Comment: 
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