Double Bottom On UPS

08/02/05 10:57:35 AM

by David Penn

What has "Brown" done for you lately? How about a double bottom with a pair of positive stochastic divergences?

Security: UPS
Position: N/A

Will United Parcel Service (UPS) soar to new yearly highs?

It's hard, if not impossible, to say. But it is hard to find a widely-known stock, one that is well-off its year-to-date highs, that is nonetheless displaying as many bullish "tells" as UPS has been in recent weeks and even months. Even though UPS has made a serious move up from its July lows near 66 to find itself in a trading range between 73 and 74, there is reason to believe that "Brown"--advertising short-hand for UPS--will be delivering more upside before its (barely) month-old advance is through.

Figure 1: Note how each bottom in this double bottom formation is accompanied by a positive stochastic divergence.

Graphic provided by: Prophet Financial, Inc.

The dominant technical feature of this chart is without a doubt the double bottom from late April to early July. Double bottoms might be my least favorite chart pattern--largely because I don't often find the sort of clearly separated bottoms that technicians like Tom Bulkowski (Encyclopedia of Chart Patterns) suggest are key to forming real double bottoms.

Bulkowski has subdivided the world of double bottoms into those featuring "Adam" bottoms--"narrow or spike bottoms"--and those featuring "Eve" bottom--"wide, rounded bottoms," as well as double bottoms that feature one of each. Here, in the case of UPS, I suspect we are dealing with "Adam & Adam" bottoms. But as with all double bottoms, it is the peak between the two trough lows that represents the breakout confirmation level. Right now, for UPS, that level is just north of 75.

Another Bulkowski caveat: Bulkowski's research suggests that seven weeks, or just about two months, is the ideal time between bottoms. When that "bottom separation" is longer than that, writes Bulkowski, "performance deteriorates." That said, those looking to buy into UPS' bounce in August might find comfort (or at least a technical "second opinion") in some of the other technical features in the UPS chart.

The most interesting of those features to me is the set of positive stochastic divergences that accompany the double bottom lows in April and again in July. Note how, in each case, just as prices are making lower and lower lows, the stochastic is making higher and higher lows. The stochastic here is 20, 20--but cross-checking with my preferred stochastic for divergences (the 7, 10) found the exact same pair of positive, stochastic divergences during the April and July lows.

In the first instance of a positive stochastic divergence, the breakout is confirmed five days after the low (target 71.30), and prices continued higher for another three to four weeks before making a closing high of 75.31. In the second instance of a positive stochastic divergence, the breakout is also confirmed five days after the low (target 70.44), and prices continued higher throughout the rest of the month. The closing high for this particular move higher is 73.20.

In and of themselves, of course, neither positive stochastic divergence augurs a breakout from the double bottom. But they do help confirm the fact that bottoms of some significance were established with the April and July lows. Such confirmation could play a big role in convincing a speculator that the double bottom forming in UPS was an opportunity for a reversal that was worth trading.

The coup de grace of the double bottom in UPS, as far as I'm concerned, might be the 2B bottom. The 2B bottom occurs when a lower low is made, yet there is no follow-through. Often, a lower low that fails to follow-through to the downside is a valuable warning that prices might reverse to the upside (because of the absence of sellers in the wake of the violation of the previous low). Here, in UPS, the April low was 66.65, while the July low was 66.10. That is what set the stage for the 2B bottom. When prices in July moved upward from 66.10--instead of downward through and beyond 66.10--the message from the 2B was clear: UPS was headed higher.

And so it has been in the days since. What is most interesting at this juncture is the narrow, sideways consolidation that began in the second half of July. While perhaps too long to be a flag, it is hard to ignore the potential bullishness of a short-term consolidation such as that one appearing immediately after a strong move up from an intermediate-term low. With a breakout level from the double bottom in the 75 area, speculators should look for signs of accumulation between that level and UPS' most recent close at about 73.

David Penn

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

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