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BREAKOUTS


Sun Finds Some Java

09/12/07 10:39:08 AM
by Arthur Hill

Sun Microsystems surged over the last four weeks and broke some key resistance levels to reverse a six-month downtrend.

Security:   JAVA
Position:   Accumulate

The weekly chart captures the current surge and breakout quite well (Figure 1). The stock surged from July 2006 until February 2007 and then corrected over the next six months. This correction formed a falling wedge or price channel (blue lines) and retraced around two-thirds of the prior advance. It looked like a breakdown in mid-August, but JAVA rebounded quite quickly to break the February 2007 trendline and exceed its summer highs. This breakout is bullish and signals a continuation of the prior advance.

FIGURE 1: JAVA, WEEKLY. This chart captures the current surge and breakout.
Graphic provided by: TeleChart2007.
Graphic provided by: Telechart2007.
 
Long-term momentum turns up as well. Weekly MACD declined the first half of the year and remained below its signal line from January to June. The indicator bottomed at the end of June and turned up in July. The current break above the signal line is positive for momentum, and further strength into positive territory would be outright bullish.

Despite this breakout on the weekly chart, JAVA is getting overextended on the daily chart and ripe for a pullback or a consolidation (Figure 2). The stock broke resistance just above 5.40, and there is also a small consolidation in this area (gray oval). Broken resistance and the consolidation turn into support, and a pullback to this area could offer a second chance to partake in the uptrend.

FIGURE 2: JAVA, DAILY. Despite the breakout on the weekly chart, JAVA is getting overextended on the daily and ripe for a pullback or a consolidation.
Graphic provided by: Telechart2007.
 
The relative strength index (RSI) becomes overbought. The bottom indicator is the RSI and it becomes overbought when it is above 70. While overbought serves as a warning to new longs, it is also a testament to underlying strength. Securities can become overbought and remain overbought. Even so, I would heed the warning and wait for either a pullback or a consolidation. Let JAVA work off the overbought conditions and then look for a position.



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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