Retail HOLDRS Forming Candlestick Bottom

10/14/05 07:53:19 AM

by Arthur Hill

After a sharp decline, the retail HOLDRS firmed in September and formed at least three candlestick reversals in the last few weeks.

Security: RTH
Position: Accumulate

The first candlestick reversal was a bullish engulfing pattern on September 22 (Figure 1). The stock dropped to around 90 with a series of black candlesticks in mid-September. On September 22, RTH opened below the prior low and appeared headed for further weakness. However, the bulls managed to hold 90 and mount a rally. The stock closed above the prior high, and the long white candlestick completely engulfed the prior black candlestick. Score one for the bulls.

FIGURE 1: RTH. The retail HOLDRS opened below its prior low and appeared headed for further weakness, but the bulls managed to rally.

Graphic provided by: MetaStock.

Graphic provided by: MS QuoteCenter.

The stock consolidated the next few weeks and appeared headed lower after a gap down on October 12. The stock gapped lower and moved below 90 intraday. However, the bulls were able to rally and push prices back toward the open. The result is a small black candlestick with a long lower shadow, more commonly known as a hammer. A hammer also formed on October 13, making it appear that the bears are running out of steam.

A bullish candlestick reversal is only as good as its followthrough; the one after the bullish engulfing pattern was weak. The next day, the stock formed a small white candlestick with an upper shadow and could not hold its gains. There was another confirmation attempt two days later, but a black candlestick formed and the bulls just didn't have the mojo.

The current hammers are potentially bullish, but need to be confirmed with further strength. First, the stock needs to fill the October 12th gap. Second, RTH needs to break above the late September high (94). Such a move would also break the August trendline and call for a rally back toward the August support break at 99.

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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Retail HOLDRS Forming Candlestick Bottom

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