Disk Drive Index Hits Support

02/20/07 12:17:11 PM

by Arthur Hill

The Computer Disk Drive Index ($DDX) remains in a clear downtrend, but support is at hand and RSI shows signs of a bottom.

Security: $DDX
Position: Hold

The Computer Disk Drive Index ($DDX) surged from July to November 2006 and was one of the market leaders at the time. However, the index suddenly peaked in late November and declined sharply in December and January. The index went from outperforming to underperforming (Figure 1). The blue line shows DDX relative to the Standard & Poor's 500. DDX outperforms when this line rises and underperforms when it falls. This price relative has been declining the last two to three months, and DDX remains an underperformer.

FIGURE 1: COMPUTER DISK DRIVE INDEX, DAILY. DDX outperforms when the blue line, DDX relative to the S&P 500, rises, and underperforms when it falls.

Graphic provided by: Telechart 2007.

Despite underperformance, the index hit support last week and the decline is slowing. DDX has support around 150 from the late September and late October lows (Figure 2). In addition, 150 also marks a 50% retracement of the July–November advance. A 50–62% retracement is normal for a correction. The relative strength index (RSI) moved below 30 in January and became oversold. The indicator also dipped below 30 last week but held above its January low and a small positive divergence formed. This shows less downside momentum, and a break above 50 would be turn the RSI bullish.

FIGURE 2: COMPUTER DISK DRIVE INDEX, DAILY. The decline traced out a clear falling price channel and it would take a break above the upper trendline (158) to break this fall.

Graphic provided by: Telechart 2007.

Support and waning downside momentum are potential positives, but the index remains short of an actual trend reversal. Buying at support is for bottom-pickers, and buying breakouts is for trend-followers. The decline traced out a clear falling price channel and it would take a break above the upper trendline (158) to break this fall. I am holding out for a break above the late January high at 159.27 for a convincing trend change. This high formed with a long white candlestick and immediate failure (red oval). The index needs to overcome this failure to fully reverse the current downtrend.

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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Disk Drive Index Hits Support

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