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DOUBLE TOPS


A Double Top For DR Horton

05/16/06 08:16:28 AM
by Arthur Hill

This home-builder stock is testing support from its October 2005 lows, and a break below this level would confirm a double-top formation.

Security:   DHI
Position:   Hold

The double top is a bearish reversal pattern that requires confirmation with a break below the intermittent low. DR Horton (DHI) formed two peaks near 40 and a reaction low around 29 (Figure 1). The whole pattern extends from May 2005 to May 2006 and represents a large distribution pattern. A break below the October low (28.78) would confirm the pattern and project further weakness to 18-19.

FIGURE 1: DR HORTON. Downside volume has been above average through 2006, and this shows more interest in selling than buying (blue oval).
Graphic provided by: MetaStock.
 
On-balance volume (OBV) and volume confirm that distribution is under way. OBV moved higher with the stock from July 2004 to July 2005. OBV then broke trendline support in October 2005 and horizontal support in April 2006; OBV did not even bounce when the stock moved above 40 in January. There was little upside volume on this advance, and downside volume expanded on the subsequent decline. Downside volume has been above average throughout 2006 and this shows more interest in selling than buying (blue oval).

There is a support zone just below 20 from the 2004 lows. This support zone jibes with the downside target of the double top, provided there is a support break at 28.78. Even if support holds, I would not consider a bullish position as long as OBV is trending lower and would wait for a break above the black trendline extending down from July 2005.



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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