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HEAD & SHOULDERS


A Head & Shoulders For AIG

03/08/06 08:52:22 AM
by Arthur Hill

AIG formed a nice head & shoulders over the last few months, and a break below neckline support would confirm the bearish reversal pattern.

Security:   AIG
Position:   Sell

The head & shoulders pattern is quite apparent in Figure 1. It extends back to November with the left shoulder peaking in late November 2005, the head in early January 2006, and the right shoulder in mid-February. The pattern is symmetrical and neckline support is at 65. A move below 65 would project further weakness to around 59. The height of the pattern (6) was subtracted from the support break for a target.

FIGURE 1: AIG AND OBV. The OBV suggests that the head & shoulders pattern seen here extending back to November 2005 will be confirmed.
Graphic provided by: MetaStock.
Graphic provided by: MS Quotecenter.
 
On-balance volume (OBV) suggests that this pattern will be confirmed. Joseph Granville's volume-based indicator is built on the assumption that volume leads price. In addition, OBV trends higher when buying pressure prevails and lower when selling pressure dominates. OBV peaked with the stock in January and moved below its December low. AIG held its December low, and OBV shows more weakness. The indicator went on to form a lower high in February and a lower low in March. This qualifies as a downtrend in OBV and I would look for prices to follow.

A support break in AIG would have ramifications for the broader market. AIG is part of the Dow Jones Industrial Average (DJIA), the Standard & Poor's 500, and the finance sector. As such, a support break and trend change would weigh on all three. As a relatively high-priced stock (>65), AIG carries above-average influence in the price-weighted DJIA. The finance sector is the single-largest sector in the S&P 500, and AIG is a leader in this sector. As the finance sector goes, so goes the S&P 500.



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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Date: 03/08/06Rank: 4Comment: 
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