RIG Reverses After Support Break

09/05/06 09:48:28 AM

by Arthur Hill

A failed support break for Transocean looks like a bear trap that could keep the long-term uptrend alive.

Security: RIG
Position: Accumulate

Transocean (RIG) and a number of oil services stocks formed head & shoulders patterns over the last few months. For RIG, the left shoulder formed in February, the head in May, and the right shoulder in July (Figure 1). Neckline support was at 70 and the stock broke support with a high-volume decline in August. It looked like a picture-perfect head & shoulders, and the downside target was to around 50. The length of the pattern from head to neckline (70-50) was subtracted from the neckline break for a target.

FIGURE 1: TRANSOCEAN. Over the last few months, a number of oil services stocks formed head & shoulders patterns, of which RIG was one.

Graphic provided by: MetaStock.

High volume seemed to validate the support break, but RIG came roaring back with a gap and high-volume advance on Friday (Figure 2). Broken support turns into resistance, and this is the first test of bullish resolve. A weak stock should break support and continue lower without looking back. RIG broke support, but suddenly firmed around 65 and consolidated in August. The support break did turn into resistance later in August, but this newfound resistance level is under assault in September already.

The right half of the head & shoulders pattern looks like a falling price channel, and the stock found support at the lower trendline. I drew the upper trendline first and the lower trendline is based on, and parallel to, this trendline. If the head & shoulders is negated, then we must consider the possibility that the falling price channel was a big correction and a break above the upper trendline would reinstate the long-term uptrend.

FIGURE 2: TRANSOCEAN. RIG came back with a gap and a high-volume advance.

Graphic provided by: MetaStock.

RIG finished right at broken support (resistance) around 71 on Friday. Further strength would snap the bear trap and this would negate the head & shoulders pattern. Friday's bounce is impressive because of the gap and high volume. It is just one day, however, and follow-through is needed for confirmation. Another good day on high volume should not be ignored.

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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HEAD & SHOULDERS

RIG Reverses After Support Break

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