A Bullish Pattern For Large-Cap Growth

07/18/05 01:33:30 PM

by Arthur Hill

The July surge in IVW completed the right shoulder of a bullish continuation pattern, and volume patterns are pointing to a breakout.

Security: IVW
Position: Hold

On the daily price chart, the iShare S&P/Barra Growth (IVW) exchange traded fund (ETF), which is a large-cap growth ETF, formed an inverse head-and-shoulders pattern. Following a decline, these are bullish reversal patterns. Following an advance, these are bullish continuation patterns. The key to both is confirmation with a break above neckline resistance.

Graphic provided by: MetaStock.

Graphic provided by: Reuters Data.

This pattern extends back to December and covers more than seven months. The left shoulder formed in January, the head in April, and the right shoulder in June/July. The neckline marks resistance at 59 and this stock has been turned away from this level at least five times (gray arrows). A break above 59 on good volume would target further strength to 63 (59 - 55 = 4, 59 + 4 = 63).

Volume flows are important to any head-and-shoulders pattern. Ideally, upside volume should start to increase as the right half of the pattern forms. I have elected to use the accumulation/distribution line and on-balance volume (OBV) to analyze volume. OBV broke to a new high in early June, and the accumulation/distribution line moved to a new high last week. Both indicators show strength, and this increases the chances of a breakout. A move below key support at 56 would negate the pattern and turn the chart bearish.

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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