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HEAD & SHOULDERS


Two Bearish Patterns Spell Lower Prices For Nucor

05/16/05 10:59:52 AM
by Arthur Hill

Nucor recently broke pennant support and is now testing neckline support of a head-and-shoulders reversal.

Security:   NUE
Position:   Sell

Recently, Nucor (NUE) broke pennant support and is now testing neckline support of a head-and-shoulders reversal (Figure 1). First, let's focus on the pennant. The stock declined sharply from late March to mid-April and then consolidated around 50-55. The consolidation formed a pennant, and these are continuation patterns that signal a rest in an ongoing move. The prior move was down and the lower trendline break signaled a continuation of this move.

The decline and pennant support break both occurred on high volume. Downside volume surged in late March, mid-April, and again in mid-May (red arrows). This shows a clear pattern of increased selling pressure and further validates the pennant break.

Figure 1: NUE weekly chart. Recently, Nucor broke pennant support and is now testing neckline support of a head-and-shoulders reversal.
Graphic provided by: MetaStock.
Graphic provided by: Reuters Data.
 
The bigger pattern at work is a head-and-shoulders reversal with neckline support at 47 (Figure 2). The left shoulder formed in November-December 2004, the head in February-March 2005 and the right shoulder in April-May 2005. A move below 47 would confirm this pattern and project further weakness toward 33. The length of the pattern (head to neckline) is subtracted from the neckline for a target. This target is confirmed by broken resistance that extends back to March-April 2004.

Figure 2: NUE monthly chart. The left shoulder formed in November-December 2004, the head in February-March 2005 and the right shoulder in April-May 2005. A move below 47 would confirm this pattern and project further weakness toward 33. The length of the pattern (head to neckline) is subtracted from the neckline for a target. This target is confirmed by broken resistance that extends back to March-April 2004.
Graphic provided by: MetaStock.
Graphic provided by: Reuters Data.
 
As noted, downside volume increased as the stock fell from the top of the head to neckline support. The pennant is also the right shoulder. The high volume decline and pennant break increase the odds of a neckline break. A move above 55 would negate this bearish prognosis.



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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