XM Satellite Traces Out A Double Bottom

11/07/06 07:57:42 AM

by Arthur Hill

XM Satellite gapped up on high volume to solidify support and open the door to a double-bottom reversal pattern.

Security: XMSR
Position: Accumulate

The double bottom is clear on XM Satellite's (XMSR) weekly chart (Figure 1, gray box). The stock declined over the last 12 to 15 months with a move from around 36 to around 10. The stock found support around 10 in late July and again in late October. The two equal lows formed a double bottom, and a move above the September high (14.2) would confirm this pattern. Based on a breakout, the upside projection would be around 18.5 (14.2 - 10 = 4.2, 14.2 + 4.2 = 18.4). There is also resistance from broken support around 20 and this is also a target.

FIGURE 1: XM SATELLITE, WEEKLY. Note the double bottom (gray box).

Graphic provided by: TC2000.com.

Graphic provided by: Telechart 2007.

Turning to the daily chart (Figure 2), we can focus on the two lows and the recent gap. The late July low formed with a bullish engulfing pattern and a two-day surge above 12.5. The late October low formed an inverted hammer and a long white candlestick. The surge carried XMSR above 11.5 and this week's gap carried the stock above 13. The overall surge over the last two weeks occurred with above-average volume, and this validates the move.

FIGURE 2, XM SATELLITE, DAILY. The late July low formed with a bullish engulfing pattern.

Graphic provided by: TC2000.com.

Graphic provided by: Telechart 2007.

The moving average convergence/divergence (MACD) formed a positive divergence over the last few months and moved above its signal line. The higher low in October shows diminished downside momentum and the move above the signal line shows improving momentum. The MACD is on the verge of turning positive, and this would further the bullish argument.

Even though XMSR has yet to confirm the double bottom, the bulk of the evidence is turning bullish and I expect at least a resistance challenge. The gap is bullish as long as it remains unfilled, and this is the focus of success or failure. I will set support at 11 and remain bullish as long as this level holds. A move below 11 would fill the gap and likely turn the MACD down again.

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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