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HEAD & SHOULDERS


3M Lags The Dow

03/21/06 08:19:10 AM
by Arthur Hill

The Dow Jones Industrial Average is breaking out to new highs, but 3M remains down in the dumps with a bearish continuation pattern in the works.

Security:   MMM
Position:   Hold

Who would have thought? 3M is one of the pricier components of the price-weighted Dow Jones Industrial Average (DJIA). Even though the DJIA recently moved to a new 52-week high, the stock has fallen from the upper 80s to the low 70s over the last 12 months. Despite poor relative strength, support is near for 3M, and the relative strength index (RSI) is perking up (see Figure 1).

FIGURE 1: MMM, WEEKLY. 3M established support in February 2006, and a break above the upper trendline of the falling wedge pattern may be in the works.
Graphic provided by: MetaStock.
Graphic provided by: MS QuoteCenter.
 
MMM established support around 70 with lows in August 2005, October 2005, and February 2006. While the stock formed three equal lows, RSI formed higher lows over the same period. This is a positive divergence and could foreshadow a trend reversal in the stock price. RSI broke above the red trendline, extending down from December 2003, and further strength above the 2005 highs (60) would be bullish for momentum. For the stock, I would look for a break above the upper trendline of the falling wedge pattern to confirm.

FIGURE 2: 3M, HEAD & SHOULDERS. A glance at the past six to seven months indicates a head & shoulders pattern formed. Can this be construed as a continuation pattern?
Graphic provided by: MetaStock.
Graphic provided by: MS QuoteCenter.
 
As long as the upper trendline of the falling wedge holds, the current trend for MMM is down and we should not ignore the bearish possibilities. Homing in on the most recent six to seven months, I see a head & shoulders pattern in the works (Figure 2). Because of the current downtrend, I would view this as a continuation pattern, and a move below neckline support at 70 would confirm it. The distance from head to neckline would then be subtracted from the neckline break for a target, which is to the next support level around 60.



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.

Title: Editor
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Date: 03/21/06Rank: 4Comment: 
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