Lexmark Gets Cold Feet At Resistance

10/25/06 02:53:47 PM

by Arthur Hill

Lexmark is up over 20% since July, but a shooting star and high-volume drop suggests an end to the current runup.

Security: LXK
Position: Sell

The weekly chart for Lexmark International (LXK) sets the stage for resistance that extends all the way back to January 2003 (Figure 1). However, 60 marked support, not resistance, in January 2003. The stock reinforced support at 60 in July 2003 and again in July 2005. The break came with a massive decline in October 2005. Once broken, support turned into resistance and it took Lexmark a full year to get back to broken support. The decline from 61.45 to 40 lasted one month (October 2005), and the recovery took 12 times as long (one year).

FIGURE 1: LEXMARK INTERNATIONAL, WEEKLY. LXK reinforced support at 60 in July 2003 and again in July 2005.

Graphic provided by: TC2000.com.

Graphic provided by: Telechart 2007.

Even though the current advance is a year old, it has only retraced 38% of the prior decline and formed a rising price channel. The prior extends from 100 to 40. The 38% retracement is relatively shallow, and this tells me that it is a corrective advance. In addition, the advance traced out a rising price channel and this is typical for corrective advances. A move below the lower trendline would signal a continuation lower and project further weakness to support around 40.

FIGURE 2: LEXMARK INTERNATIONAL, DAILY. The shooting star has a long upper shadow that represents the intraday high.

Graphic provided by: TC2000.com.

Graphic provided by: Telechart 2007.

Turning to the daily chart (Figure 2), we can see the shooting star and high-volume decline over the last two days. The shooting star has a long upper shadow that represents the intraday high. The stock surged during the day but could not hold gains, and this represents a small blow-off top. The subsequent decline on high volume confirms the shooting star and a break below the July trendline (59) would argue for reversal of the three-month uptrend.

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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