A BNI Breakdown

11/27/07 08:00:33 AM

by Arthur Hill

Burlington Northern Santa Fe recently broke channel support, signaling a continuation of a downtrend that started this summer.

Security: BNI
Position: Sell

Burlington Northern Santa Fe (BNI) recently broke channel support, signaling a continuation of a downtrend that started this summer. Both Figures 1 and 2 feature a linear regression channel, and here's the logic behind this indicator. The middle line is the linear regression and the outer lines are parallel to the linear regression. An uptrend is in force as long as the lower parallel line holds and a downtrend is in force as long as the upper parallel line holds.

FIGURE 1: BNI, WEEKLY. BNI broke the lower parallel trendline with a sharp decline this summer.

Graphic provided by: TeleChart 2007.

On the weekly chart (Figure 1), BNI broke the lower parallel trendline with a sharp decline this summer. In addition, the stock broke support at $86.32 and at $83.50. This breakdown reversed the long-term uptrend and the stock declined to the low $70s. The summer decline (from high to low) exceeded 20% and created an oversold situation.

After becoming oversold, BNI rallied from late summer until late autumn. The advance carried the stock above $86 and it was then possible to draw another regression channel. The regression is based on closing prices so the signals should also be based on closing prices. Intraday lows below the lower parallel trendline do not count as a break (mid-October).

FIGURE 2: BNI, DAILY. With a sharp decline the last eight days, BNI broke the lower parallel trendline to reverse the three-month uptrend.

Graphic provided by: TeleChart 2007.

With a sharp decline the last eight days, BNI broke the lower parallel trendline to reverse the three-month uptrend (Figure 2). This break is clear and definitive. It calls for a continuation of the summer decline and the downside target is to the upper $60s. It is also worth noting that the moving average convergence/divergence (MACD) moved into negative territory for the first time since early September and momentum is also bearish.

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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A BNI Breakdown

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