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ASCENDING TRIANGLES


Mixed Signals For Motorola

07/07/05 02:43:25 PM
by Gary Grosschadl

Since bouncing off its 200-period EMA in April, Motorola has enjoyed a 20% gain. Is this leading to a breakout or a reversal?

Security:   MOT (NYSE)
Position:   Hold

Ascending triangles are most often considered bullish continuation patterns, but this one is a little suspect for now. Bearish considerations include the recent shooting star candlestick, lack of volume, and weak buying power. Bullish consideration is given to the ascending triangle pattern and several indicators with strong formations.

On the bullish side, we have a five-point test of a recognizable ascending triangle pattern. The more often the limits of any triangle are tested, the more potential it has for an upcoming breakout attempt. Several indicators also show their bullish bias. The directional movement indicator at the top of the chart shows a bullish setup as the rising average directional index (ADX) — positioned between properly aligned directional indicators (DIs) — approaches 25. Many traders favor a rising ADX above 25 with +DI above -DI as the most bullish setup. Also on the bullish side, the MACD (moving average convergence/divergence) and the RSI (relative strength indicator) both show a strong uptrend.

However, several factors must also be considered on the bearish side. A noticeable increase in volume should accompany a pattern break to show conviction in the move. Without this, traders often assume a false move is underway and pass on the trade to avoid being whipsawed. Two other indicators will also cause traders to hesitate taking a long position in this scenario: the stochastics oscillator is in a toppy area above the 80 level (which is often a precursor to a downleg), and the Chaiken money flow indicator (CMF) shows an obvious lack of buying power. Weak buying power and not enough volume speak of a lack of conviction among traders.

The weekly chart shows an interesting dynamic, but there are conflicting indicators. Trading is never easy, and this chart illustrates the quandry of mixed blessings.
Graphic provided by: StockCharts.com.
 
Note that at each foray to the top trendline, a reversal candlestick pattern emerged. First, a tweezer top and harami combination, then a bearish pattern called "bearish engulfing", and now a recent shooting star candlestick. This hints at another downswing to the bottom trendline and a further tightening of this pattern. A close above the top of this shooting star candle would negate the bearish implication and ideally a large increase in volume would also help to bring in new bulls. But until this happens, this stock is a hold at best, with a finger near the sell button, should another downleg begin.



Gary Grosschadl

Independent Canadian equities trader and technical analyst based in Peterborough
Ontario, Canada.

Website: www.whatsonsale.ca/financial.html
E-mail address: gwg7@sympatico.ca

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Date: 07/07/05Rank: 3Comment: talking a lot about candlestick patterns, but using a bar chart?
Date: 07/08/05Rank: 5Comment: 
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