|Harmonic Inc. (HLIT) has been running hard since it gapped above its 200-day moving average. Now, candlesticks hint at a possible top and several indicators are signaling their own early warning. After an extended upleg, a doji candlestick (small cross) can mark a turning point or reversal. The matching open and close represents a stalemate between the bulls and bears. This can be a sign of upward momentum being lost. A spinning top candlestick with its small real body says much the same thing.|
|The next move becomes important as how this small ascending triangle is resolved, determining whether the bulls or bears assume control. A close above 7.70 (top trendline) would negate those warning candlesticks while a close below the slanted trendline likely signals a downleg (Figure 1).|
|FIGURE 1: HARMONIC, INC., DAILY. This chart shows a strong run for HLIT, but can it continue?|
|Graphic provided by: StockCharts.com.|
|Note the two rectangle formations or congestion zones. They could come into play again as potential support levels should a bigger downleg occur. However, just above those congestion zones, two significant moving averages could also offer support. These are the 50-day exponential moving average (EMA), currently at 6.19, and the 200-day EMA at 5.58.|
|Several indicators are worth considering. The average directional movement index (ADX) shows an interesting history. Generally, when this line rises above both directional indicators (DIs), it is considered "overheated." A reversal is likely not very far off. In this case, it stayed overextended or overheated for a longer period. Now, this line appears to have peaked above 60 and now is starting to decline. This infers the bull move has peaked and a reversal could occur.|
|The moving average convergence/divergence (MACD) also appears to have peaked and is just starting to dip below its signal line. This is a potential sell signal for short-term traders.|
The relative strength index (RSI) shows its own concern a different way. Note the negative divergence to price action. As the stock price retested the previous high in the small triangle, the RSI clearly weakened. This often points to a coming downleg. The stochastic oscillator also shows, similar to the ADX line, that it has been in a overbought situation for an extended time. A move below 80 often signals a downturn. In this case, I would watch for a decline below previous support 70. Should a downturn develop, keep an eye on the downside targets mentioned as possible turning points.
Click here for more information about our publications!