Maxtor Consolidates As Head-and-Shoulders Formation Evolves

06/01/05 12:00:54 PM

by Arthur Hill

Maxtor has a large inverse head-and-shoulders pattern working and looks ripe for a neckline test.

Security: MXO
Position: Accumulate

On the weekly candlestick chart (Figure 1), the inverse head-and-shoulders pattern extends from July 2004 to May 2005. This is a massive pattern, and a breakout would result in a significant trend change. The right shoulder is still a work in progress and would not be completed until the stock moves up to neckline resistance at 6. The stock broke the (blue) trendline extending down from October 2003 and the right shoulder represents a consolidation after this breakout.

Figure 1: MXO. The inverse head-and-shoulders pattern extends from July 2004 to May 2005. This is a massive pattern, and a breakout would result in a significant trend change.

Graphic provided by: MetaStock.

Graphic provided by: Reuters Data.

As the consolidation unfolds, Bollinger Bands have contracted to their narrowest level in more than two years. Such a narrowing of the bands represents a consolidation, and this usually precedes a significant move. As the blue circles indicate, prior moves below 0.5 preceded big moves in 2002, 2003, and 2004. Look for a move back above 0.5 to signal the start of the next significant move.

The Chaikin money flow suggests that the next move will be up. The indicator was negative most of 2004 and turned positive in March 2005. This volume-based indicator measures accumulation and distribution. As long as it remains in positive territory, the forces of accumulation are winning and a breakout above 6 should be expected. The low of the head is around 3 and a breakout would target further strength to around 9. There is support at 4.4 and a move below this level would negate the head-and-shoulders pattern.

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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HEAD & SHOULDERS

Maxtor Consolidates As Head-and-Shoulders Formation Evolves

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