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DOUBLE BOTTOMS


A Support Test For THQI

09/26/07 11:28:09 AM
by Arthur Hill

THQ Inc. is testing support from its prior low, and traders should be on guard for a bounce and a potential double bottom.

Security:   THQI
Position:   Accumulate

Let's start with the weekly chart for some perspective (Figure 1). The stock advanced from July 2006 until April 2007 and then declined over the last six months. This decline retraced 62% of the advance and the stock is finding support around 26; 62% stems from the Fibonacci ratio of 0.618 and stocks sometimes retrace this amount of the prior move, be it up or down.

FIGURE 1: THQI, WEEKLY. This stock advanced from July 2006 to April 2007 and then declined over the next six months.
Graphic provided by: telechart2007.
 
In addition to support from the retracement, the stock formed a reaction low in August and shows signs of firming in September. The August low features a candlestick with a long lower shadow and this shows an intraweek reversal. The stock moved lower during the week, but rallied by the end of the week and closed strong. A similar candlestick formed in September, but the close was not as strong because the candlestick was black. Nevertheless, the combination affirms support and we should be on guard for a bounce.

On the daily chart (Figure 2), we can see the evolving double bottom around 25–26. The August high marks double-bottom resistance and it would take a move above this level to confirm the pattern. Note that broken support turned into resistance at 30, and this is the level to beat. The stock surged off support three days ago and this is the early signal for bottom-pickers.

FIGURE 2: THQI, DAILY. Here we can see the evolving double bottom around 25–26.
Graphic provided by: telechart2007.
 
The relative strength index (RSI) formed a higher low and a positive divergence is working. The RSI moved below 30 in early August and became oversold. While the stock moved to a new low in September, the RSI held above its prior low and this created the positive divergence that shows less downside momentum. Further strength above the August high would be bullish for momentum and the RSI.



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
Company: TDTrader.com
Address: Willem Geetsstraat 17
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Phone # for sales: 3215345465
Website: www.tdtrader.com
E-mail address: arthurh@tdtrader.com

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