Cue On Big Blue

08/14/06 08:50:39 AM

by Arthur Hill

After a surge in mid-July and consolidation in August, IBM traders should cue off the 50-day moving average for a continuation breakout.

Security: IBM
Position: Hold

IBM may not be as dominant as it once was, but it is still a big player in the technology sector and is a key component for the Dow Jones industrials and the Standard & Poor's 500. As such, traders should still watch this bellwether stock for clues about the overall market. The stock is holding most of its late-July gains, and a continuation breakout would be most bullish for all involved.

On the price chart (Figure 1), the stock surged in mid-July with a big gap on good volume. In fact, this was the highest volume since April 2005. The stock continued higher later that month and then fell back in August. The pullback in August occurred on lighter volume, showing modest selling pressure.

FIGURE 1: IBM. A break above the upper trendline would signal a continuation higher.

Graphic provided by: MetaStock.

The decline looks like a falling wedge or flag. I elected to draw through the August 3rd spike low because it occurred in the first 30 minutes and the stock recovered quite quickly. I am looking for the overall pattern here, and the decline over the last two weeks looks like a falling wedge or flag (magenta trendlines). These are potentially bullish corrections, and a break above the upper trendline would signal a continuation higher.

The 50-day moving average also stands in the way of a breakout. This moving average offered resistance in early August and currently sits just below 77. A move above 77 would break both the 50-day MA and the upper flag trendline. I would then expect further strength toward 81 (red line) and set key support at 75.

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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Cue On Big Blue

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