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FLAGS AND PENNANTS


The Amex Computer Index Looks Toppy

02/26/07 10:10:33 AM
by Arthur Hill

The Amex Computer Index formed a head & shoulders reversal pattern over the last three months, and a neckline break at this point would be bearish.

Security:   $XCI
Position:   Hold

The Amex Computer Index ($XCI) reads like a who's who of the technology sector. It features Apple, Adobe, Applied Materials, Cisco, Dell, Google, Hewlett Packard, IBM, Oracle, Texas Instruments, and Yahoo!. It would actually make a pretty good exchange traded fund (ETF). With its array of top tech stocks, I find this index a good bellwether for technology overall and the NASDAQ.

FIGURE 1: XCI, DAILY. The S&P 500, NASDAQ, and Russell 2000 all moved above their January highs this month, but XCI remains well below the high.
Graphic provided by: Telechart 2007.
 
The Amex Computer Index ($XCI) has been showing relative weakness in February, and this is the first concern (Figure 1). The Standard & Poor's 500, NASDAQ, and Russell 2000 all moved above their January highs this month, but XCI remains well below this high. XCI stalled around 815 in late January and consolidated over the last four weeks. This consolidation looks like a flat flag, and a break below the February low would signal a continuation of the mid-January decline.

FIGURE 2: XCI, DAILY. The index has a bearish head & shoulders pattern working over the last three months.
Graphic provided by: Telechart 2007.
 
In addition to the flag, the index has had a bearish head & shoulders pattern working over the last three months (Figure 2). The left shoulder formed in December, the head in January, the right shoulder in February, and neckline support resides at 790. A break below neckline support would confirm this pattern and target a move to around 735. The length of the pattern (835–790) is subtracted from the breakpoint for a downside target (45 – 790 = 745). Needless to say, this would weigh on the NASDAQ and technology sector.

It ain't broken until it's broken. The flag and head & shoulders are potentially bearish patterns that require some confirmation. With neckline support so close, I would pass on the flag break and wait for a neckline break for a signal. Should XCI hold support around 790–795, look for a break above the shoulder/flag high (815) to revive the bulls.



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: 02/27/07Rank: 4Comment: 
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