Dell And The Descending Triangle

03/30/06 12:18:52 PM

by Arthur Hill

Dell found support just above 28 over the last five months, but it means little as long as the lower highs persist.

Security: DELL
Position: Sell

Before looking for potential patterns, we should first establish the long-term trend: It is clearly down. First, the stock is trading well below the 200-day simple moving average (SMA). Second, the 200-day SMA is declining and has yet to flatten or turn up. Third, the stock gapped down in August (red oval) and lost over 30% from August to November. The percentage decline alone is not reason enough for a downtrend, but the move did break key support from the April 2005 low (gray oval) and the stock has yet to recover. See Figure 1.

FIGURE 1: DELL, MONTHLY. The long-term trend is clearly down, breaking key support from the April 2005 low (gray oval).

Graphic provided by: MetaStock.

With a downtrend established, there are two patterns to look for: bullish reversal patterns and bearish continuation patterns. The stock established support between 28 and 29 with at least three reaction lows over the last five months. It looked as if a double bottom may be forming, and I wrote about this on February 9 (gray box). There was no follow-through to the gap, and the stock formed a lower high in February to cancel the possible double bottom.

FIGURE 2: DELL, WEEKLY. Note the descending triangle forming, clearly a bearish continuation pattern.

Graphic provided by: MetaStock.

With the lower high, a potential descending triangle is taking shape (Figure 2). This is a bearish continuation pattern. The lower highs show that selling pressure is entering the picture earlier — not a good sign. The equal lows represent demand and show that buyers are not willing to see this level broached. A break below the five-month low would break demand, confirm the pattern, and signal a continuation lower. The only way to negate this pattern is with a higher high. It would take a break above the February high to revive the double bottom and turn bullish.

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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