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REGRESSION ANALYSIS


Johnson & Johnson Corrects Back To Breakout

12/05/06 01:13:54 PM
by Arthur Hill

Is the decline in Johnson & Johnson a mere correction, or is it the start of something bigger? Here's what to look for.

Security:   JNJ
Position:   Hold

Johnson & Johnson (JNJ) led the Dow Jones industrials higher in July and October but pulled back in November and dropped from the leader board. The decline is relatively minor and the stock remains well above its 200-day moving average. I would consider the long-term trend up as long as the stock holds above the rising 200-day moving average. Should the stock break this moving average or the moving average turn down, I would then consider the long-term trend down. As long as the long-term trend is up, declines are deemed corrective and I would look for continuation breakouts.

The November decline returned to broken resistance and the stock is finding support around 65. This is a basic tenet of technical analysis (broken resistance turns into support). The stock bounced off 65 in mid-November and is testing this level again in early December. A strong stock should hold its breakout and a move back below 65 would be negative.

FIGURE 1: JOHNSON & JOHNSON, DAILY. Note the regression channel. The middle line is the linear regression, while the upper and lower trendlines are parallel.
Graphic provided by: TC2000.com.
Graphic provided by: Telechart 2007.
 
A continuation higher is dependent on a reversal of the six-week downtrend and I am watching two items to identify a reversal. On the price chart (Figure 1), I drew a regression channel. The middle line is the linear regression, while the upper and lower trendlines are parallel. The decline now looks like a falling flag and a move above the upper channel line (67) would be bullish. Second, I am watching the relative strength index (RSI) for a break above 55. The RSI often finds support between 40 and 50 when a stock is in an uptrend. The indicator has been firming between 40 and 50 over the last three weeks and a break above 55 would turn momentum bullish 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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