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Harmonic Inc. Hitting High Notes

10/02/06 08:52:31 AM
by Gary Grosschadl

Harmonic Inc. seems to have hit a wall at $7.75. If so, a correction may be overdue.

Security:   HLIT
Position:   Sell

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:
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.

Gary Grosschadl

Independent Canadian equities trader and technical analyst based in Peterborough
Ontario, Canada.

E-mail address:

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Date: 10/03/06Rank: 5Comment: 

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