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BROADENING FORMATION


MidCaps Leading The Pack

06/17/05 07:39:35 AM
by Arthur Hill

Fueled by the Home Builders, the S&P MidCap ETF is leading the market higher, but a broadening formation and waning momentum suggest caution.

Security:   MDY
Position:   Hold

On the weekly price chart (Figure 1), the stock forged a higher high in March (red arrow) and a lower low in April (green arrow). By connecting the prior high and low with trendlines, a broadening formation is emerging. These are typically big bearish reversal patterns that imply increased volatility. It is clear from the higher high and lower low that sentiment shifts are quite sharp and the stock appears on its way to the upper trendline (~130).

Figure 1: MDY. On this weekly price chart, the S&P MidCap ETF forged a higher high in March and a lower low in April.
Graphic provided by: MetaStock.
Graphic provided by: Reuters Data.
 
Momentum just ain't what it used be. Moving average convergence/divergence (MACD) formed a negative divergence from December to March and moved below its signal line in late March. This produced a MACD sell signal, but the stock found support in mid-April and rebounded. Despite the rebound and higher high this month, MACD remains well below its March high. Thus, another negative divergence is brewing, and a move below the signal line would produce another MACD sell signal.

It ain't over until it's over. After a long white candlestick and a break above 120, the stock has moved higher the last four weeks. Even though momentum is slowing, it is prudent to wait for some sort of reversal. Enter the March high (red oval): After a white candlestick in early March, the stock opened strong and then closed weak to form a piercing pattern. This pattern was confirmed with further weakness the very next week and led to the April low. Before counting on a reversal of the current advance, I would wait for a candlestick reversal to take shape.



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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E-mail address: arthurh@tdtrader.com

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Date: 06/18/05Rank: Comment: what is your stock market
Date: 06/18/05Rank: 4Comment: 
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