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CANDLESTICK CHARTING


Cisco Forms Harami At Support

01/11/08 09:46:00 AM
by Arthur Hill

After a mean decline the last few weeks, Cisco formed a potentially bullish harami that could foreshadow an oversold bounce.

Security:   CSCO
Position:   Hold

Figure 1 shows weekly candlesticks extending back to October 2006. Cisco (CSCO) found support around 25–26 in the first half of 2007 and then shot higher in the second half of the year. With the decline over the last nine weeks, the stock returned to this support zone and could firm around 25–26.

FIGURE 1: CSCO, WEEKLY. These candlesticks extend back to October 2006.
Graphic provided by: TeleChart2007.
 
On Figure 2, CSCO declined sharply the last nine weeks and became oversold. The bottom indicator window shows a 14-day relative strength index (RSI) and this oscillator dipped below 30. The RSI is considered oversold when below 30 and overbought when above 70. With this oversold reading, the odds of a bounce or consolidation increase.

After breaking support at 27, CSCO formed a harami over the last two days. The white candlestick is completely inside the body of the previous day's candlestick, which is black. This shows a sudden about-face as the bulls were able to start strong and finish strong, hence the white candlestick. Harami require confirmation, and a break back above broken support at 27 would be short-term bullish. The first upside target would the resistance around 29.

FIGURE 2: CSCO, DAILY. This stock declined sharply the last nine weeks and became oversold.
Graphic provided by: TeleChart2007.
 
Impressive upside volume improves the chances of a breakout. I was surprised to see that volume on up days has been higher than volume on down days since mid-December (blue boxes). This shows more interest in buying than selling. The white candlestick of the harami also formed with above-average volume. Good volume would further validate any breakout.



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
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