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Armstrong World Industries: It's The Pattern, Not The Name, That Matters11/20/07 08:26:17 AM
by Mike Carr, CMT
Different analysts can see different patterns in charts, but all analysts should agree on whether the patterns are bullish or bearish.
|Armstrong World Industries, Inc. (AWI), is a global leader in the design and manufacture of floors, ceilings, and cabinets, and has been in business since 1860. In 2006, Armstrong's net sales totaled approximately $3.4 billion. Armstrong operates 40 plants in 10 countries and has approximately 13,000 employees worldwide. It's a company that has probably been hurt by the housing slowdown but should recover quickly as remodeling replaces property-flipping for homeowners.|
|Recently, the stock broke out of resistance and looks like it just broke out of a classic cup-with-handle pattern (Figure 1). Popularized by William O'Neil in the 1990s, this pattern is a favorite of momentum investors. Many traders learn only a few patterns and look for them in charts, expecting that they will soon discover the path to riches this way. But the cup-with-handle formation is a bullish continuation pattern and should occur after an up move. In Figure 1, we see that AWI has formed a base after a decline.|
|FIGURE 1: ARMSTRONG WORLD INDUSTRIES, DAILY. Here, it looks as if the stock broke out of a classic cup-with-handle pattern.|
|Graphic provided by: www.patternscans.com.|
|We could also call the basing pattern that formed over the past 15 weeks as a scallop formation. This pattern is identified by finding two price peaks with a rounded valley between the peaks. There are two scallop patterns in this chart, one short one forming from August into September 2007 and the second forming between September and November.|
|If we ignore the brief price rise that occurred in September, we could call the pattern a rounding bottom. This highlights a problem with chart analysis — subjective interpretation of price action leads different analysts to describe the same chart in different terms. The important thing to notice on this chart is that price has moved in a tight range for nearly four months. In the past week, it broke above the previous resistance level on heavy volume. This is bullish; it doesn't matter how you describe it, AWI represents a good buy with an easily identified stop three points below the breakout price.|
Mike Carr, CMT
Mike Carr, CMT, is a member of the Market Technicians Association, and editor of the MTA's newsletter, Technically Speaking. He is also the author of "Smarter Investing in Any Economy: The Definitive Guide to Relative Strength Investing," and "Conquering the Divide: How to Use Economic Indicators to Catch Stock Market Trends."
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Date: 11/25/07Rank: 3Comment: