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CHART ANALYSIS


Sierra Wireless Heading Lower

07/27/07 08:56:00 AM
by Gary Grosschadl

Several candlestick warnings hint at the coming downside.

Security:   SW.TO
Position:   Sell

Even before this last black candlestick, propects were looking dubious for this high-tech player trading in Toronto. As this daily chart shows, a series of "stars" (small-bodied candlesticks) and a hanging man candlestick hinted that a further rise was unlikely (Figure 1). When a stock has peaked, small-bodied candlesticks often appear. The appearance of a hanging man candlestick (small black body with a long tail) also shows a danger signal.

As always, it is wise to look for collaborating evidence, and several indicators display this. At the top of the chart, the average directional movement index (ADX) peaked several weeks ago, showing that the strong previous uptrend was quickly weakening.

Meanwhile, the volume pattern was also declining. Stocks rising on weakening volume is usually suspect. Below Figure 1, more negative divergences appear via the moving average convergence/divergence (MACD), the relative strength index (RSI), and the Chaikin money flow indicator (CMF). When stocks increase while indicators head the opposite way, a correction is often likely.

FIGURE 1: SW, DAILY. This chart shows that a strong rise may be challenged.
Graphic provided by: StockCharts.com.
 
The close under this stock's 20-day exponential moving average (EMA) likely will bring at least a test of the previous support level at $25. Failure there may bring a deeper correction to the ever-prominent 200-day EMA. The 200-period moving average often is a trading target, as this is deemed to be strong support.

In conclusion, more downside is indicated. The question, as always, revolves around support targets. Watch for the trading action at the $25 level to gauge whether further downside comes into play. Should temporary support be offered at $25, be wary, as the stock will then be resisted by the overhead 20-day EMA, an important upside test for any reversal.



Gary Grosschadl

Independent Canadian equities trader and technical analyst based in Peterborough
Ontario, Canada.

Website: www.whatsonsale.ca/financial.html
E-mail address: gwg7@sympatico.ca

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