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CCI


Negative Divergence Hangs Over Sandisk

05/04/06 07:51:01 AM
by Arthur Hill

Sandisk bounced over the last few weeks, but the current advance looks corrective and a negative divergence in the commodity channel index should be watched carefully.

Security:   SNDK
Position:   Hold

On the daily chart (Figure 1), Sandisk (SNDK) declined sharply in the first part of the year and bounced over the last two months. The decline extended from 80 to 52, but the advance just managed to clear 65. This represents a 50% retracement of the prior decline, and this is what we would expect on a corrective rally. On its first move above 65, the stock formed a shooting star in early April (blue oval). On its latest foray above 65 at the end of April, the stock formed a bearish engulfing pattern the very next day (red oval). These bearish candlestick reversals show that there is substantial resistance in this area.

FIGURE 1: SANDISK, DAILY. SNDK declined in the first part of 2006 but started on its way back up over the last two months.
Graphic provided by: MetaStock.
Graphic provided by: MS QuoteCenter.
 
The commodity channel index (CCI) moved above 100 (overbought) in early April and then formed a negative divergence over the last few weeks. While the stock managed to close above 65 in mid-April, CCI formed a lower high and upside momentum is waning. Not only is upside momentum waning, but CCI also moved below zero and below its prior low. The indicator did not just flatten out. It moved lower and the break below zero was quite negative (literally and figuratively).

I should also point out that downside volume surged when the stock declined in mid April (blue oval). The stock bounced during the last week of April, but upside volume was very low and buyers are not showing a lot of enthusiasm. This is not a good sign, and I will be watching the March trendline and late April low for signs of a breakdown. A move below 57 would break both and signal a continuation of the prior decline.



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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