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eBay Tests Overhead Resistance

12/18/06 09:00:32 AM
by Gary Grosschadl

eBay has come off a summer bottom for a nice gain, but what's it got in store now?

Security:   EBAY
Position:   Hold

Figure 1, a weekly chart of eBay (EBAY), shows a doji bottom from late July. Dojis often mark important turning points after a significant rise or fall. In this case, the intrepid bottom-picker who took a chance on this potential turnaround signal would be sitting on a 30% gain over four months.

Now another potential entry point draws near in the form of an overhead resistance test at the 200-period exponential moving average (EMA). Note how the stock price is caught between the 200-period EMA resistance and the 20-period EMA support. The outcome here will likely be a tradable move. Current action seems to hint at the successful support off the often-telling 20-period EMA. If so, the next close above the 200-period EMA could signal the next upleg.

On the other hand, a sudden reversal to close below the 20-period EMA would be bearish, possibly leading to a double bottom test.

FIGURE 1: EBAY, WEEKLY. This chart shows the stock caught between two moving average lines. Watch for a coming resolution.
Graphic provided by:
Several indicators should be examined at this point. At the top of Figure 1, the directional movement indicator with its three parameters shows a bullish cross of its positive and negative directional indicators (DIs). This points to a shift to bullish power.

The earliest buy signal confirming the bullish doji candlestick came with the moving average convergence/divergence (MACD) crossover. The next buy signal was the relative strength index (RSI) moving above the key 50 area, which coincides with the close above the 20-period EMA. Finally, the aforementioned DI crossover kicks in, lagging the other indicators.

The cautionary indicator is the stochastic oscillator showing a downturn from overbought levels. However, if support from the 20-period EMA holds, it will manifest as a "high stochastic turn." With enough bullishness, the stochastic oscillator can "stick high," indicating the presence of a strong uptrend in place.

The upside targets for another bullish upthrust are shown as a former resistance zone of $40–42 and then the previous high of $47. But first, the 200-period EMA must be beaten.

Gary Grosschadl

Independent Canadian equities trader and technical analyst based in Peterborough
Ontario, Canada.

E-mail address:

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