BEA Systems Making A Breakout Bid

08/25/06 08:27:34 AM

by Arthur Hill

BEA Systems is on the verge of an important breakout after a gap and high-volume surge.

Security: BEAS
Position: Accumulate

On the weekly chart (Figure 1), BEA Systems (BEAS) advanced from October to April and then declined from April to July. The advance was sharp and strong and the decline was choppy and tentative. Note that the decline formed a falling price channel and these patterns are typical for corrections. In addition, upside volume has been strong since December, consistently outpacing downside volume (green box), even during the correction. The stock broke the upper trendline with the long white candlestick and further strength above the July high would be bullish.

FIGURE 1: BEA SYSTEMS, WEEKLY. BEAS advanced from October 2005 to April 2006 and then declined from April to July.

Graphic provided by: MetaStock.

Turning to the daily chart (Figure 2) for detail, we can see a gap and strong upside volume in August. The stock found support around 11 and surged above 13 with the highest volume since May (blue box). The gap is holding and volume validates the move. The stock consolidated below 13.5 the last few days and a break above this level would complete the breakout needed to turn the weekly chart bullish.

FIGURE 2: BEA SYSTEMS, DAILY. Here, we can see a gap and strong upside volume in August.

Graphic provided by: MetaStock.

The moving average convergence/divergence (MACD) already broke above its prior highs and momentum is bullish. Momentum oscillators lead price and are leading indicators. MACD is interesting because it takes two lagging indicators (moving averages) and turns them into a leading indicator by subtracting the longer moving average from the shorter one. During the April–July decline, the MACD met resistance just above the zero line in early June and early July (red line). Even though the August surge fell short of a new high for the stock, MACD forged a multimonth high with a breakout of its own. This is bullish for momentum and further increases the odds of a breakout in the stock.

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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