An Oversold Breakout For Wachovia

09/19/07 08:37:43 AM

by Arthur Hill

The long-term trend remains down, but Wachovia became oversold and a recent flag breakout suggests more room to the upside for this bounce.

Security: WB
Position: Accumulate

Let's first look at the weekly chart for some perspective on the long-term situation (Figure 1). Wachovia (WB) formed a head & shoulders reversal from September 2006 to July 2007. This looks like one big distribution pattern. The left shoulder formed in September–October 2006, the head in January, and the right shoulder in May. Neckline support was at 53 and the stock broke through in late June, a month before the breakdown in the Standard & Poor's 500.

FIGURE 1: WACHOVIA, WEEKLY. WB formed a head & shoulders reversal from September 2006 to July 2007, looking like a big distribution pattern.

Graphic provided by: telechart2007.

The stock declined to around 45 and became quite oversold. A 26% decline (59 to 45) in just over five months is pretty steep for a banking stock. The stock found support at 45 twice in August and formed a big bullish engulfing in mid-August (green oval). This pattern is quite positive and reinforces support. Follow-through above 50.50 would confirm the bullish engulfing.

On the daily chart (Figure 2), Wachovia formed a falling flag and broke flag resistance with a surge over the last three days. There is also a bullish engulfing on the daily chart (green oval) and the flag breakout signals a continuation of the August surge. The upside target is broken (neckline) support around 53–54. The moving average convergence/divergence (MACD) is poised to confirm this breakout with a move above its signal line. Moreover, the MACD is in positive territory and momentum is picking up.

FIGURE 2: WACHOVIA, DAILY. WB formed a falling flag and broke flag resistance with a surge over the last three days.

Graphic provided by: telechart2007.

While the flag breakout and bullish engulfing patterns point to further gains, the head & shoulders on the weekly chart is the dominant long-term pattern. There will still be countertrend advances and a return to broken (neckline) support is normal. In addition, a bounce back to 53–54 would retrace around 62% of the prior decline and this is also normal. I am willing to turn short-term bullish, but will keep the bigger downtrend in mind and watch closely.

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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An Oversold Breakout For Wachovia

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