Dell's Double Bottom

02/09/06 08:48:35 AM

by Arthur Hill

Dell bounced off support from its prior low with big volume, and now, a potential double bottom is taking shape.

Security: DELL
Position: Accumulate

Before looking at the double bottom, let's review the long-term DELL chart (Figure 1). The stock formed a massive double top from November 2004 to August 2005 (gray oval) and broke support with a sharp decline last year. This is no small support break, and the confirmed double top projected further weakness to around (42.57 - 34.4 = 8.17, 34.4 - 8.17 =) 26.23. The decline stopped short of its target as Dell found support around 28-29. Broken support around 34-35 now turns into resistance.

FIGURE 1: DELL, LONG TERM. Dell formed a massive double top from late 2004 to mid-2005 and broke support with a sharp declline.

Graphic provided by: MetaStock.

Turning to the daily chart (Figure 2), we can see the 2005 decline and the potential double bottom over the last three to four months. The stock established support just below 29 twice and surged on big volume the last three days. Double-top resistance is at 33.22 (October high), and a move above this level is required to confirm the double bottom. Without such confirmation, the double bottom remains only a potential pattern and cannot be considered bullish just yet.

FIGURE 2: DELL, DAILY. A glance at this chart shows the decline during 2005 and the potential double bottom forming over the past three to four months.

Graphic provided by: MetaStock.

In addition to the double bottom, the relative strength index (RSI) formed a large positive divergence over the last few months. DELL formed roughly equal lows (November–February) and the RSI formed a higher low. This shows less downside momentum on the second decline and forms the positive divergence. The RSI also held above 30 during the last decline and moved above 50 with the latest surge. The combination of high volume and improving momentum increases the chances of this double bottom bearing fruit. Even if the double bottom is confirmed with a move above 33.22, I would be wary of resistance from broken support at 34-35. The double top is much bigger (and badder) than the double bottom and is likely to hold greater sway.

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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DOUBLE BOTTOMS

Dell's Double Bottom

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