Avaya Continues Higher

05/09/06 07:53:43 AM

by Arthur Hill

A recent neckline breakout on good volume points to higher prices for Avaya.

Security: AV
Position: Accumulate

On the price chart (Figure 1), the stock surged from July to October 2005 and then consolidated for six months. That was a pretty long consolidation, and that makes the breakout even more important. Consolidation resistance is marked at 12 with at least four failed attempts (reaction high). The lows are not equal, and this is why I see an inverse head & shoulders pattern. The December low marks the left shoulder, the January–February low marks the head, and the April low forms the right shoulder. Neckline resistance is set at 12 and the breakout signals a continuation higher.

FIGURE 1: AVAYA. AV surged from July to October and then consolidated for six months.

Graphic provided by: MetaStock.

Graphic provided by: MS QuoteCenter.

Volume is an important part of the head & shoulders pattern, and the surge in upside volume confirms the breakout (blue ovals). A breakout on low volume would not carry the same force. This sharp increase in buying pressure creates a big group of shareholders in the 11-13 area. Demand is strong around 11-13, and this means we can expect support in this area. Failure to hold the breakout at 12 would be negative and a break below the April low would be outright bearish.

Even though the breakout is bullish, traders should be careful because the stock is short-term overbought. The stochastic oscillator moved above 80 at the end of April and remains above 80. The bulls are in firm control as long as 80 holds. This is because stocks can become overbought and remain overbought. A move below 80 would signal a pullback or consolidation that could offer a second chance to partake in the bigger uptrend.

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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