Petsmart Returns To The Scene Of The Crime

11/15/05 08:16:21 AM

by Arthur Hill

Petsmart confirmed a major reversal pattern and returned to this support break, which now marks an important resistance level.

Security: PETM
Position: Sell

Figure 1 shows that the stock formed a massive head & shoulders reversal that extended from May 2004 to Aug 2005 (16 months). The pattern was almost picture-perfect and the neckline break around 25-26 provided clear confirmation. Broken support turned into resistance (26), and the stock is testing this level even now.

FIGURE 1: PETM. This head & shoulders pattern is almost picture-perfect, and the neckline break provides cleaer confirmation.

Graphic provided by: MetaStock.

Graphic provided by: MS QuoteCenter.

As long as the stock remains below resistance from broken support (26), the bears are on firm footing and have nothing to worry about. Weak securities should break support levels and hold these breaks. When support breaks fail to hold, the bulls should take notice. A move back above 26 would be positive and question the neckline support break (bearish case).

FIGURE 2: PETSMART RETRACEMENT. After the 62% retracement of the prior advance, there is support around 21 from the August 2003 resistance break (green oval).

Graphic provided by: MetaStock.

Graphic provided by: MS QuoteCenter.

The head & shoulders is the dominant pattern, but a different look at Figure 2 shows that the decline could be a big correction. The stock surged from 10 to 36 (2003-04) and then declined to around 21. The move marks a 62% retracement of the prior advance and there is support around 21 from the August 2003 resistance break (green oval). This is the stuff of a classic correction.

The 2005 decline looks like a falling megaphone, which is not a classic corrective pattern. In any case, the megaphone is clearly falling as long as the upper trendline holds. Should PETM break the upper trendline (30), I would start to entertain bullish thoughts and look for a continuation of the 2003-04 advance.

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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