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REVERSAL


Divergences Drive Motorola Down

12/20/05 02:16:56 PM
by David Penn

Motorola's contributions to the gadget-led tech rally have been signature. And so has the negative divergence in November, which led to lower prices in December.

Security:   MOT
Position:   N/A

Back when I was in grad school, my Marxist (but not Marxist-Leninist, he always insisted) political science professor used to talk about the various stages of capitalism from industrial to financial to what he called "techno-pop" capitalism. What's funny is that this was in 1991 and the Marxists were already branding the New Economy as well as pundits would years later. Funny what you figure out while tumbling in the lint in that dustbin of history ...

The gadget-based rally in technology stocks in recent months has been led by such must-have products as iPods (AAPL) and cell phones -- particularly the uber-stylish Razr cellphone from Motorola (Figure 1). From a certain lay perspective, the combination of a product-led tech rally and the proximity of the end-of-the-year gift-giving season must have appeared like a slam dunk for higher prices. And for a time, higher prices seemed to be all that traders could get.

FIGURE 1: MOTOROLA. The negative divergences in MOT were apparent in both the MACD histogram and the stochastic.
Graphic provided by: Prophet Financial, Inc.
 
But while the Standard & Poor's 500 and NYSE (basis $NYA) were making new multiyear highs, the NASDAQ, in particular, was lagging. And a closer look at some of the brighter stars in the NASDAQ and technology galaxies reveals that the lag was due in large part to some of those same luminaries that had been responsible for the brightness in the first place.

If you hadn't been following Motorola closely, then you would probably be as surprised as I was to realize that 15 out of the last 16 days had been distribution or "down days." By this I mean simply days in which the stock opened higher than it closed. This run includes a string of seven consecutive "down days" leading into the Monday after the December options expiration.


But technically, this development should not have been too hard to anticipate. Refer back to the peaks in price in early and late November. Viewed alone, these peaks were part of a solid rally in Motorola stock. Viewed in the context of both the moving average convergence/divergence (MACD) histogram and the stochastic, these peaks are part of a negative divergence that threatened to send the stock into a correction of unknown severity. Insofar as I tend to think that negative divergences from stochastics are warning enough, the fact that the stochastic's negative divergence was confirmed by one in the MACD histogram was all the more clear a signal that MOT's upside was increasingly limited.

Sample entry points on this short? The high of the second, lower stochastic peak was on November 23, yet it wasn't until November 28 that the MACD histogram rolled over (that would be required even if the MACD histogram did not confirm the stochastic). That trio of candlesticks in the days leading up to November 28, it could be argued, very much resembled the "evening star" pattern from candlesticks. As candlestick expert Steve Nison notes of the pattern:


Three lines compose the evening star. The first two lines are a long, white real body followed by a star. The star is the first hint of a top. The third line corroborates a top and completes the three-line pattern of the evening star. The third line is a black real body that moves sharply into the first period's white real body. I like to compare the evening star pattern to a traffic light. The traffic light goes from green (the bullish white real body) to yellow (the star's warning signal) to red (the black real body confirms the prior trend has stopped).


November 28 was the "point" day (or pivot), and provided a short entry target at 23.61. That price was hit on December 2, with the session closing at 23.59. As of this writing, Motorola's most recent close was 22.33.




David Penn

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

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