Schlumberger Is Getting Mighty Frothy

04/05/06 08:15:21 AM

by Arthur Hill

Despite a long-term uptrend, Schlumberger is trading near resistance from its January high, and waning momentum suggests that a pullback is in order.

Security: SLB
Position: Hold

The January high formed with a confirmed bearish harami (red oval, Figure 1). This is a two-candlestick reversal pattern that formed with a long black candlestick first and then with a smaller white candlestick inside. It is basically an inside day, and this shows indecision. The move below 125 confirmed the pattern by turning indecision into weakness, foreshadowing a decline to around 112.

FIGURE 1: SCHLUMBERGER. The high formed with a bearish harami (red oval), a two-candlestick reversal pattern formed with a long black candlestick first and then a smaller white one inside.

Graphic provided by: MetaStock.

Graphic provided by: MS QuoteCenter.

The index formed another candlestick reversal pattern in early April with a shooting star (blue oval). This candlestick is noted for its small body (black or white) and long upper shadow (intraday high). The long upper shadow reflects a failed rally and the inability to hold early gains. Even though the stock closed the day near its lows, one day is not enough for a reversal, and further weakness below 125 would confirm this bearish candlestick reversal pattern. The initial downside target would be support from the February low (110-115).

In addition to a bearish candlestick reversal pattern, the moving average convergence/divergence (MACD) shows waning upside momentum. The relatively equal highs around 130 and lower high in MACD formed a negative divergence for the indicator. Momentum is not confirming this high. However, I would not read too much into this negative divergence. The January surge was well above average (97 to 132), and it would be really hard for momentum to top this move (30% in 30 days!). Instead, I would focus on the MACD signal line (nine-day exponential moving average [EMA], or the magenta line). As long as MACD is rising and above the signal line, momentum is bullish and improving. A move below the signal line would trigger a short-term bearish signal that could be used to confirm the shooting star.

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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