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FLAGS AND PENNANTS


Amex Index Breaking Down

01/16/08 10:17:08 AM
by Arthur Hill

The energy-intensive American Stock Exchange index has been a stellar performer over the last five years, but a recent breakdown on the daily charts points to a correction.

Security:   $XAX
Position:   Sell

Figure 1 shows monthly prices for the American Stock Exchange Index ($XAX). This index contains many energy-related companies involved in the oil and gas industry. As such, its performance has been comparable to the Energy SPDR (XLE) and Oil Service HOLDRS (OIH) over the last five years. The index more than doubled from 2003 to 2007 and the long-term trend is clearly up. The August 2007 low marks long-term support around 2090.

FIGURE 1: XAX, MONTHLY. This index contains numerous energy-related companies, and as such, its performance has been comparable to other energy-related indexes.
Graphic provided by: TeleChart2007.
 
Even though the long-term trend is still up, the medium-term trend shows signs of weakness and a correction could be in order. The index declined sharply with a move to its 200-day moving average in November and then bounced. Even though the bounce reinforced support from the 200-day average, the zigzag advance traced out a rising flag, which is a bearish pattern. The index broke flag support with a sharp decline this year and ended at its 200-day MA. See Figure 2.

FIGURE 2: XAX, DAILY. Even though the long-term trend is up, the medium-term trend shows signs of weakness.
Graphic provided by: TeleChart2007.
 
There is also support around 2300 from the November low. A break below this low would complete the reversal and target a move to the support zone around 2100 (green box). This support zone stems from the August lows. With the breakdown over the last four days, I am marking resistance just above 2400 (red line). A move above this level would negate the flag break and keep the uptrend alive.



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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