Cardinal Health Stalls After Surge

08/22/06 07:52:02 AM

by Arthur Hill

After a mid-July surge, Cardinal Health stalled over the last few weeks. Traders should watch the consolidation boundaries for the next signal.

Security: CAH
Position: Hold

Cardinal Health (CAH) declined sharply from April to June and then found support in the low 60s. A big surge in mid-July broke resistance at 65.5 and the stock then formed consolidation (magenta trendlines). This is perfectly normal, as the surge created the short-term overbought situation that the stock needed to digest its gains. The stock has been digesting its gains for more than three weeks, and it is time to continue higher or reverse lower.

Bollinger Bands confirm the volatility contraction over the last few weeks. Bollinger Band width is at its narrowest since mid-July and early June. The narrowing of the bands preceded a breakdown in early June and a breakup in mid-July (gray lines). Bollinger Bands tell us when volatility contracts, and this is when traders should prepare for a breakout. However, Bollinger Bands do not provide any directional clues.

FIGURE 1: CARDINAL HEALTH. Considering the stock activity in CAH, it may be wisest to be on guard for a consolidation support break.

Graphic provided by: MetaStock.

I find the directional clues split (see Figure 1). The July surge is bullish and a break above consolidation resistance would signal a continuation of this advance. As a flag flying at half-mast, the upside target would be around 72. Failure to continue higher and a move below consolidation support would be bearish. The first downside target would then be the July lows around 62–63.

I am not impressed with the accumulation distribution line, and this points to a downside break. This volume-based indicator has been trending lower since late March and failed to break out with the July surge (red trendline). In addition, the accumulation distribution line moved all the way back to its July low over the last few weeks, and this shows selling pressure within the consolidation. Unless the accumulation distribution line reverses course, I would be on guard for a consolidation support break and move lower.

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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