Retail HOLDRS Breaking Down

11/05/07 09:07:32 AM

by Arthur Hill

The retail HOLDRS formed a bearish continuation pattern over the last few months, and the exchange traded fund is on the verge of a serious breakdown.

Security: RTH
Position: N/A

The retail HOLDRS (RTH) declined sharply in July–August and then found support around 95–96 in September–October. The exchange traded fund (ETF) basically consolidated these two months and formed a head & shoulders pattern. This head & shoulders pattern is a continuation type because it formed well below the July high and a downtrend was already in place. The left shoulder formed in late August, the head in mid-September, and the right shoulder in mid-October. Neckline support rests around 95–96 and the ETF is testing this key level after a sharp decline the last two days. A break below neckline support would signal a continuation of the July–August decline and target further weakness toward the mid-80s.

FIGURE 1: RTH, DAILY. The retail HOLDRS declined sharply in July and August and then found support around 95�ndash;96 in September through October.

Graphic provided by: TeleChart 2007.

The price relative and the on-balance volume (OBV) confirm weakness. The ETF has been underperforming the market since July. The price relative, which compares the performance of RTH to SPY, has been trending lower and recorded new lows in September, October, and now November. Big money does not like to hold relatively weak ETFs. The OBV held out a little longer than the price relative and peaked in August. The indicator moved lower in September and recorded new lows in October and again in early November. RTH is both out of favor and selling pressure remains strong. This favors a neckline support break and further weakness in the coming weeks.

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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HEAD & SHOULDERS

Retail HOLDRS Breaking Down

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