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FLAGS AND PENNANTS


Head & Shoulders Pattern Plays Out For 3M

06/08/05 07:59:22 AM
by Arthur Hill

3M was featured at the end of April with a potential head-and-shoulders pattern. The stock held neckline support, but another bearish pattern is taking shape.

Security:   MMM
Position:   Hold

First, let's recap the head-and-shoulders on the weekly chart (Figure 1). The left shoulder peaked in January 2004, the head in July 2004, and the right shoulder in March 2005. The massive bearish reversal pattern stretches over 18 months and reflects a long distribution. A move below neckline support would confirm the pattern and the downside target zone is around 60-65.

Figure 1: 3M weekly chart
Graphic provided by: MetaStock.
Graphic provided by: Reuters Data.
 
On the daily chart (Figure 2), the stock declined to neckline support around 75 and then consolidated. The pattern over the last five weeks looks like a flag with a slight rise. This is a bearish continuation pattern and a move below 75 would signal a continuation of the April decline. The downside target would also be the 60-65 region. Confirmation is the key to both patterns. Without support break, the bears have yet to take full control.

Figure 2: 3M daily chart
Graphic provided by: MetaStock.
Graphic provided by: Reuters Data.
 
The setup is there, and two indicators point to a downside break. First, the relative strength index (RSI) moved to oversold in April and then bounced back to 50 at the end of May. In a downtrend, 50 often acts as resistance and the indicator broke below the trendline, extending up from mid-April. This is a bearish development for momentum. Second, the stock continues to underperform the broader market. The price relative (MMM versus the NYSE Composite) moved to a new low over the last one to two weeks, and this shows poor relative strength. Stocks that underperform are weak and this favors a downside break.



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
Company: TDTrader.com
Address: Willem Geetsstraat 17
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Phone # for sales: 3215345465
Website: www.tdtrader.com
E-mail address: arthurh@tdtrader.com

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