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FLAGS AND PENNANTS


Cummins Breaks Flag Support

11/29/06 02:00:33 PM
by Arthur Hill

After a weak rally, Cummins Engine broke flag support, and that could lead to an even bigger trend reversal.

Security:   CMI
Position:   Sell

On Figure 1, Cummins Engine (CMI) declined sharply in late October and early November. The move occurred on high volume, and this shows a serious expansion in selling pressure. The stock then firmed just above the September low. Technically, the long-term trend is up as CMI formed a higher high in October and remains above its September low. Higher highs and higher lows define an uptrend and this trend has yet to be broken with a lower low.

FIGURE 1: CUMMINS ENGINE, WEEKLY. CMI declined sharply in late October and early November.
Graphic provided by: TC2000.com.
Graphic provided by: Telechart 2007.
 
Despite the long-term uptrend, the stock formed a bearish flag in November and broke flag support over the last two days. This signals a continuation of the prior decline and targets a decline below 110. Such a decline would break the trendline extending up from May 2005 and the September low. A trendline break and lower low would argue for a trend reversal.

FIGURE 2: CUMMINS ENGINE, DAILY. The MACD moved into negative territory and below its September low in November.
Graphic provided by: TC2000.com.
Graphic provided by: Telechart 2007.
 
The moving average convergence/divergence (MACD) confirms recent weakness and momentum is bearish (Figure 2). The MACD moved into negative territory and below its September low in November. This was the biggest negative momentum surge in months and the MACD remained in negative territory throughout November. The indicator firmed over the last few weeks but broke back below its signal line this week, and this is bearish for momentum.

The odds favor a trendline break and lower low for CMI. The MACD is negative and moving lower. The stock recently broke flag support and downside volume is brisk. The flag high now becomes resistance, and I will be watching this level for signs of strength. A recovery and break above 125 would negate my bearish outlook for CMI.



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.

Title: Editor
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Date: 11/29/06Rank: 4Comment: 
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