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HEAD & SHOULDERS

Rowan Hits Neckline Support

01/19/07 02:28:59 PM
by Arthur Hill

In spite of a 30% decline in 2006, Rowan Companies could still be in a long-term uptrend as the stock tests support from a massive head & shoulders pattern.

Security:   RDC
Position:   Hold

Figure 1 takes the long view over the past five-plus years. Rowan Companies (RDC) formed a massive ascending triangle from mid-2002 to the end of 2004 and broke resistance in early 2005. These are continuation patterns, and the breakout called for a continuation of the long-term uptrend. RDC obliged with a sharp move above 40.

FIGURE 1: ROWAN COS., WEEKLY. Rowan formed a massive ascending triangle from mid-2002 to the end of 2004 and broke resistance in 2005.
Graphic provided by: Telechart 2007.
 
The stock peaked in April 2006 and declined sharply over the next six months. The stock lost more than 30% and declined back toward the ascending triangle trendline. This trendline extends up from July 2002 and has been touched at least five times, which makes it a valid trendline. In addition to trendline support, there is support from broken resistance around 26. As long as Rowan holds this trendline, the case for a long-term uptrend could still be made.

FIGURE 2: ROWAN COS., WEEKLY. The large head & shoulders pattern that formed over the last 18 months gives some cause for alarm.
Graphic provided by: Telechart 2007.
 
Even though RDC is entering a long-term support zone, I am wary of a large head & shoulders pattern that formed over the last 18 months (Figure 2). Shoulder resistance is around 38, the head peaked around 48, and neckline support resides at 29. Using support from broken resistance at 26 and neckline support, there is a support zone around 26–29 and RDC is gearing up for a big test.

A break below neckline support at 29 would also break the trendline extending up from July 2002, and this would argue for further downside. While there is still support at 26, it would be difficult to argue with a neckline break at 29. Below 26, the next support level is around 20 from the 2004 lows, and this would be the downside target. The bulls have chance as long as RDC holds support at 29, but an upside catalyst is required to solidify support and argue for higher prices.


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: 01/19/07Rank: 4Comment: 
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