An Island Reversal For Smith International

10/17/06 08:31:20 AM

by Arthur Hill

Smith International bounced off support with an island reversal, calling for a move back to resistance.

Security: SII
Position: Accumulate

The weekly chart (Figure 1) shows that Smith International (SII) has been range-bound since December 2005. The stock bounced off support at 35 in March, June, and September. Range support is also validated by broken resistance from the December 2005 high, as broken resistance often turns into support. At the upper end of the range, the stock met resistance between 45 and 47 in February, May, July, and August. Given this sideways price action for almost a year, the trend can be classified as flat since December and a range breakout is required for a long-term directional bias.

FIGURE 1: SMITH INTERNATIONAL, WEEKLY. SII, range-bound since December 2005, bounced off support at 35 in March, June, and September.

Graphic provided by: TC2000.com.

Graphic provided by: Telechart 2007.

SII bounced off support twice in the last few weeks and formed an island reversal in early October. The first bounce in late September occurred on big volume, but the stock fell back in early October. SII held above the September low with an island reversal, and this pattern points to higher prices. The island reversal forms with two gaps separating price action. SII gapped down on October 3, stabilized, and gapped up on October 5. The gap up is holding and SII closed above 39 on Monday.

FIGURE 2: SMITH INTERNATIONAL, DAILY. The stock's island reversal calls for a move back to resistance.

Graphic provided by: TC2000.com.

Graphic provided by: Telechart 2007.

In addition to the island reversal off support, on-balance volume (OBV) is strong and momentum is bullish (Figure 2). The late September advance occurred on high volume, and this lifted OBV above its August-September highs. This is a clear breakout in OBV and shows strong buying interest. Similarly, the moving average convergence/divergence (MACD) bottomed in late September and moved above its signal line on September 28. Despite the early October pullback, the MACD remained above its signal line and momentum is moving in the right direction. As long as SII holds 37 and the MACD remains above its signal line, I would expect this bounce to continue toward range resistance around 45–47.

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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ISLAND REVERSAL

An Island Reversal For Smith International

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