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CHANNEL LINES


Up Or Over For Retail Stocks?

07/14/05 10:58:37 AM
by David Penn

Retail stocks are poised to move vertically in the near-term ... that, or smash into support like a bug against a windshield.

Security:   RTH
Position:   N/A

Retail stocks, however late they've arrived at the party, have been kicking up their heels like the best of them. As measured by the retail stock HOLDRS (RTH), these stocks have appreciated by as much as 14% since bottoming with a hammer formation in late April 2005.

How much longer will the retail dance party continue? When I last looked at the RTH ("Test And Retreat," Traders.com Advantage, May 13, 2005), these stocks were only days away from establishing a pivot low--a low that would help form the bullish trend channel that has guided the RTH ascent during the subsequent six weeks. In Figure 1, note the number of times that RTH tests both overhead resistance and underlying support as it snakes it way higher over late May, through June, and into July.

In the bullish scenario, retail stocks prepare to vault higher with support at the 10-day EMA and at the lower boundary of the two-month-old trend channel. In the bearish view, RTH plows through the side of its trend channel en route to lower prices still.
Graphic provided by: Prophet Financial, Inc.
 
It appears that retail stocks are approaching a key moment here in early July. RTH has repeatedly found support along the lower boundary of the channel in late June and early July. At this point, the RTH has two alternatives: either continue at its current angle of ascent, or increase the angle of ascent. (RTH could simply break down from here as well, but that would pretty much take care of all speculation on its near-term fate.) If RTH continues at its current pace, then it will violate the support provided by the lower boundary of the trend channel--a bearish prospect. On the other hand, RTH could move sharply higher in an effort to avoid plowing through support. If that occurs, prices may move higher and faster in the short term, but the possibility of a dramatic reversal (brought on by an unsustainably steep rally) would dramatically increase.

A few other reasons can be found for caution in retail. The advance on July 5 and the failure to follow through on July 6 appears to be setting up a short-term 2B top. Lower prices in the subsequent days will be critical to confirm the top. The additional possibility of a negative stochastic divergence between the price high in mid-June and the higher high in early July on the one hand, and the corresponding high and lower highs in the (7, 10) stochastic on the other hand, both contribute to the precariousness of RTH, as far as the long side is concerned.



David Penn

Technical Writer for Technical Analysis of STOCKS & COMMODITIES magazine, Working-Money.com, and Traders.com Advantage.

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