Best Buy Tests Key Support

05/11/07 02:16:32 PM

by Arthur Hill

Best Buy has a large double top working on the weekly chart, but support has yet to be broken and there is a small double bottom working on the daily chart.

Security: BBY
Position: Hold

On the weekly chart (Figure 1), Best Buy (BBY) peaked in the upper 50s twice in 2006 and the intermittent low established support around $43–$44. The pattern looks like a big double top, but it has yet to be confirmed. Support is still holding and the bulls are not broken just yet. A break below $43 would confirm the double top and target further weakness toward $30. Ouch. The length of the pattern is subtracted from the support break for a downside target.

FIGURE 1: BEST BUY, WEEKLY. There's a large double top working here, but support has yet to be broken, with ...

Graphic provided by: MetaStock.

Not so fast! The stock is trending lower on the daily chart (Figure 2), but the relative strength index (RSI) formed a higher low and downside momentum is slowing. The indicator moved below $30 in later February and became oversold. The stock dipped to support again in early May, but the RSI formed a higher low. Technically, BBY did not close below its prior low, and we cannot officially call for a positive divergence in the RSI. However, the higher low is positive, and a move above $60 would break the downtrend in the RSI. This would turn momentum bullish again, and this signal could be used to confirm a breakout in the stock.

FIGURE 2: BEST BUY, DAILY. A small double bottom working on the daily chart.

Graphic provided by: MetaStock.

On the price chart, I am watching the November trendline and the March high for signs of strength. The November trendline marks resistance at $48.50, and a break above this level would be the first bullish sign. An actual trend reversal cannot take place without a higher high, and it would take a move above $50.30 to fully reverse the six-month downtrend. In fact, we could view this as a small double bottom and a break above the March high would project further strength to around $55–$56.

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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Best Buy Tests Key Support

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