Texas Instruments Retests Recent Lows

01/11/08 11:39:23 AM

by Paolo Pezzutti

The stock is attempting a rebound after a long downtrend.

Security: TXN
Position: N/A

As you can see in Figure 1, Texas Instruments (TXN) on the daily time frame is moving within a slightly converging down channel. From the relative top printed on July 17, 2007, at $39.63, prices have lost more than 20%. The swings within the channel are wide and the lower trendline has already been tested three times, providing a visual reference of support levels.

In Figure 1 I have used the moving average convergence/divergence (MACD). It calculates two exponential moving averages (EMAs) of the lengths specified by the inputs (5 and 34, in this case). The difference between these averages is plotted. This value is then averaged for a specified number of bars (5 in my chart) and then plotted. I find that these parameters provide a good insight of the underlying trend and signal divergences in the momentum of price action.

The MACD displays a positive divergence not confirming the recent lows of price printed at the end of November 2007 and at the beginning of 2008. As we all know, divergences do not provide per se an evidence of trend reversal but can alert about the possibility of technical conditions that could trigger at least a rebound. When associated with other elements, they can be useful.

In this case, you can see that TXN has just printed a double low retesting the $30 level. This test is quite important to verify the possibility of price to move up toward the upper trendline of the channel at $33.50.
The candlestick bars printed on January 9 and 10 are hammers. A hammer forms when the price moves significantly lower after the open but rallies to close well above the intraday low. The resulting candlestick leaves a long stick. It is normally a bullish indication as traders, after a weak start, enter the market aggressively and the stock closes higher for the day. The hammers are printed right at the support level, indicating that this is an important support.

FIGURE 1: TXN, DAILY. The stock is moving within a downward channel and is retesting recent lows. The MACD displays positive divergences. Two consecutive hammers reinforce the importance of the support.

Graphic provided by: TradeStation.

In Figure 2, you can see the 60-minute chart. After a long downtrend, prices found a support printing a double low associated with a positive divergence of the MACD. The pivot between the two lows is at $31.61. If confirmed, the objective of this pattern would be around the $33 level.

Risk is high on this stock. It is inserted within a downward channel, and all we can expect so far is a rebound. The breakout to the downside of the $30 level would negate this scenario.

FIGURE 2: TXN, DAILY. The retest of the previous has occurred in coincidence with a positive divergence of the MACD. The objective is at $33. A brekout to the downside of the $30 level would negate the formation.

Graphic provided by: TradeStation.

Paolo Pezzutti

He is the author of the book "Trading the US Markets - A Comprehensive Guide to US Markets for International Traders and Investors" - Harriman House (July 2008)