MMM Hits The Gap Zone

06/30/06 08:15:56 AM

by Arthur Hill

3M enters its make-or-break point with a consolidation at support.

Security: MMM
Position: Accumulate

On the weekly chart (Figure 1), 3M broke resistance around 79 with a big surge earlier this year. The stock moved from the low 70s to the upper 80s and became overbought as the relative strength index (RSI) moved above 70 (black oval). The stock needed to work off this overbought condition with a pullback or consolidation. MMM chose the pullback route with a decline to around 79 the last two months.

FIGURE 1: MMM, WEEKLY. 3M broke resistance around 79 in mid-spring, eventually pulling back with a decline in early summer.

Graphic provided by: MetaStock.

A number of chart features come together around 79 to mark support. First, broken resistance turns into support. This is a key tenet of technical analysis and the stock firmed around 79 over the last three weeks. Second, the decline represents a 50–62% retracement of the February–May advance. This is normal for a pullback. Third, the stock is finding support around 79 from the April gap. (See Figure 2.)

FIGURE 2: MMM. Currently, the stock is finding support around 79 from the April gap.

Graphic provided by: MetaStock.

The stock further affirms support around 79 with a consolidation the last four weeks. MMM has traded between 78.61 and 81.5 over the last 14 days. This is a pretty tight consolidation that reflects a stalemate between bulls and bears. A consolidation break is required to break the stalemate. A move above 82 would break consolidation resistance and the trendline extending down from the May high. This would be bullish and the first target would be the May high around 88–89. Failure to break above 82 and a break below consolidation support (78.5) would be bearish. This would signal a continuation of the prior decline and target a move to the low 70s.

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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MMM Hits The Gap Zone

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