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WEDGE FORMATIONS


Pulte Is Failing At Resistance

04/13/06 08:29:43 AM
by Arthur Hill

Uninspiring money flows and resistance spell trouble for Pulte Homes.

Security:   PHM
Position:   Sell

On the price chart for Pulte Homes (PHM), a classic bearish setup is emerging (Figure 1). The stock declined in January–March 2006 and bounced over the last six weeks. The bounce formed a rising wedge and retraced 62% of the prior decline. The rising wedge is a bearish corrective pattern and the 62% retracement is typical for bear rallies (corrective rallies). Resistance from this Fibonacci number is also confirmed by the February high at 41.

FIGURE 1: PULTE HOMES. On this price chart for PHM, a classic bearish setup is emerging. So what can we expect now?
Graphic provided by: MetaStock.
 
The rally off the March low looks pretty impressive on the price chart with a few long white candlesticks and succession of higher highs. However, the accumulation-distribution line is not as easily impressed. The indicator has yet to exceed its February or March highs. Looking at the last six weeks (gray box), you can also see that this indicator has not kept pace with recent price action (the wedge). Prices moved above the mid-March and late March highs, but the indicator failed to clear resistance. This shows that buying pressure is not that strong and the accumulation-distribution line needs a breakout to confirm price action.

So what now? We have a bearish setup on the price chart and nonconfirmation in the accumulation-distribution line. The stock is already showing signs of selling pressure with a move back below 40 over the last two days. The first bear signal would be a break below the lower wedge trendline and the second would be a break below the prior lows (green line). This would signal a continuation of the January–March decline and project further weakness to the low 30s.



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: 04/13/06Rank: 4Comment: 
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