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DOUBLE BOTTOMS


FTSE: Double Bottom Or Rising Flag?

07/17/06 08:17:12 AM
by Arthur Hill

Even though the FTSE broke resistance at 5800 and this break is holding, the pattern does not look like a robust double bottom and traders should be on guard for a failed breakout.

Security:   $FTSE
Position:   Hold

The pattern since mid-May looks like a double bottom because the May–June lows are relatively equal, and there is an intermittent high at 5800. If this were a double bottom, then the breakout at 5800 would confirm the bullish reversal and project further strength to around 6100. However, double bottoms are major bullish reversal patterns that form after an extended decline. The May–June decline in the FTSE lasted less than two months, and the index only lost 10%. This decline is quite mild, and I would not view this as a double bottom.

Even though the double bottom has been ruled out, the breakout at 5800 is still quite positive. The index did exceed a prior high, and this breakout is holding. Broken resistance at 5800 turns into resistance (Figure 1) and this is the first level to watch for signs of a breakout failure.

FIGURE 1: FTSE, DAILY. Watch for the development of a flag or price channel, which are typical for corrective rallies and a break below the lower trendline (5750) would signal a continuation of the May–June decline.
Graphic provided by: MetaStock.
 
I am watching for the development of flag or price channel over the last four weeks. These patterns are typical for corrective rallies, and a break below the lower trendline (5750) would signal a continuation of the May–June decline. Such a signal would project a break below the June low.

In addition to the rising price channel, I am watching the relative strength index (RSI) as it trades above 50. The indicator moved from oversold levels in mid-May to 61.5 in early July. As long as the RSI holds the blue trendline extending up from mid-May, momentum is bullish and strong. A move below this trendline and below 50 would turn momentum bearish.



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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Date: 07/18/06Rank: 4Comment: 
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