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CANDLESTICK CHARTING

Bullish Engulfing Seals Support For Steel Tech

01/24/07 10:58:47 AM
by Arthur Hill

A huge bullish engulfing pattern for Steel Technologies reinforces support and sets the stage for further gains.

Security:   STTX
Position:   Accumulate

Before looking at the bullish engulfing, let's take a look at the weekly chart and long-term support for Steel Technologies (STTX) (Figure 1). The stock established support around 16–17 with three bounces in the last two years (June 2005, June 2006, and January 2007). The first bounce started a rally that extended to around 30. The second bounce fizzled just below 25 and did not last long. The third bounce is still quite young, and further strength is needed for range breakout.

FIGURE 1: STEEL TECH, WEEKLY. STTX established support around 16–17 with three bounces in the last two years.
Graphic provided by: Telechart 2007.
 
On the daily chart (Figure 2), STTX gapped down in late October and then formed a fairly tight trading range between 16 and 19. There was a high-volume surge in mid-December, but the move fizzled at 19 and the stock pulled back toward support. The stock is going nowhere right now and the next directional signal depends on the range break. A move above 19 puts the bulls in charge and a move below 16 would be bearish.

FIGURE 2: STEEL TECH, DAILY. STTX gapped down in late October and then formed a tight trading range between 16 and 19.
Graphic provided by: Telechart 2007.
 
There are bullish engulfing patterns and then there are big bullish engulfing patterns. On January 23, STTX opened weak with a move below 17 and closed exceptionally strong with a move above 18.5. This is a big intraday move and the long white candlestick engulfed the prior eight candlesticks. Volume was well above average, and this validates the pattern. At the very least, this reinforces support at 16.4. For the bulls, the only thing missing is a break above resistance at 19. Upon such a breakout, I would expect a challenge to the August high (24–25).


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: 01/25/07Rank: 4Comment: 
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