A Harami And Divergence For Apple

09/07/06 07:55:18 AM

by Arthur Hill

Apple has formed a potentially bearish harami, and traders should watch the relative strength index to confirm this pattern.

Security: AAPL
Position: Hold

The harami is a bearish candlestick pattern made up of two candlesticks, the first of which is a long white candlestick and the second is a smaller black candlestick that fits inside the long white candlestick (gray circle, Figure 1). The long white candlestick affirms the current trend. The smaller black candlestick forms with a weak open and weak close. This shows sudden indecision and could foreshadow a trend change.

FIGURE 1: APPLE COMPUTER. A move below 50 would confirm the bearish divergence and could be used to confirm the potentially bearish harami.

Graphic provided by: MetaStock.

The harami alone is not enough to forecast a trend change, and it is best to look for confirmation. On the price chart for Apple Computer (AAPL), I am watching the 30-day moving average and the late August low. The stock broke below the 30-day moving average in May, and this led to a substantial fall. The July break back above the moving average led to a nice advance. Just below the moving average, the late August low established support at 65. A move below 65 would break the 30-day moving average and this low. Such a move would confirm the harami and call for a short-term reversal.

For indicators, I like to use the relative strength index (RSI) to confirm a short-term trend reversal. The 15-period RSI broke below 50 in May and this confirmed a downtrend that lasted about two months. The indicator then broke above 50 in July to confirm an uptrend that has lasted about one and a half months. The RSI formed a lower high in early September and a bearish divergence is taking shape. A move below 50 would confirm the bearish divergence and could be used to confirm the potentially bearish harami.

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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A Harami And Divergence For Apple

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