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ISLAND REVERSAL


Retail HOLDRS Still Firming At Support

11/01/05 08:53:12 AM
by Arthur Hill

The retail HOLDRS formed an island reversal at support, adding to the parade of bullish reversal patterns over the last two months.

Security:   RTH
Position:   Accumulate

I wrote about the retail HOLDRS (RTH) on October 14 when the stock formed a bullish engulfing (September 22) and two hammers (October 13-14). The break above 94 seemed to confirm these patterns, but the stock quickly fell back to 90 with a gap and a long black candlestick on October 27. Despite this failed breakout, the stock held support and gapped higher two days later. With a gap down on October 27 and gap up on October 31, an island reversal has formed and a break above 95 would be most bullish.

FIGURE 1: RTH. While the stock closed below its September low last week, RSI formed a higher low, forming a bullish divergence as the indicator is stronger than the underlying stock (green line).
Graphic provided by: MetaStock.
Graphic provided by: MS QuoteCenter.
 
In addition to the bullish candlestick reversals and successful support test, the relative strength index (RSI) formed a bullish divergence. While the stock closed below its September low last week, RSI formed a higher low, forming a bullish divergence as the indicator is stronger than the underlying stock (green line, Figure 1). In addition, RSI broke the red trendline extending down from mid-July and now has an uptrend working since September 21. Momentum is moving in the right direction for the bulls.

Mind the gap: An upside gap is bullish as long as it holds. The stock closed at 92.15 on October 28 and it would take a move below this level to fill the gap. This would negate the island reversal. Technically, the stock would still be in a trading range and it would take a move below 90 to break support and signal a continuation of the prior decline. Should the stock hold the gap and break above key resistance at 95, I would look for further strength 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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