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MOVING AVERAGES


Millennium Pharmaceuticals Bouncing Off Strong Support

02/28/08 08:59:03 AM
by Gary Grosschadl

After a big rise, stocks will often languish sideways or correct down before making another bull move.

Security:   MLNM
Position:   N/A

Figure 1 shows an admirable gain from last autumn, rising near 65% in only three months. Note the classic buy signal when the 50-day exponential moving average (EMA) crossed over the 200-day EMA. It languished sideways for about the same time frame, extinguishing the final bulls after a brief attempt at $17. The 50-day EMA held brief support until a convincing black candlestick closed beneath it.

The first sign of possible support came with the hammer candlestick just above $13. That mark held support in the next two trading days. Note how that level corresponded with a previous congestion level from last November. The other major consideration was the close proximity to the ever-important 200-day EMA. Stocks often respect that strong level of support or resistance.

FIGURE 1: MLNM, DAILY. This chart shows a bounce near strong support.
Graphic provided by: StockCharts.com.
 
Below the chart, several indicators are considered. The moving average convergence/divergence (MACD) shows a strong buy signal. After a large decline to below the zero-line, a bullish crossover is one of my favorite buy signals. This indicator lags a little (by several days) so it is not meant to time the precise bottom. The relative strength signal (RSI) shows a similar move to a low level bouncing off 30. The move above the often key resistance area of 50 is another bullish sign. As expected, the stochastic oscillator shows a bullish up leg. A downturn from the 80 level usually points to some type of consolidation as the stock takes a breather, or possible reversal.

There are two considerations for an upside target. The first is a possible gap resistance near 15.50. The stock may balk at that point and have to reload before mustering a stab at the previous high near $17. A move beyond $17 is not ruled out, but there would have to be some bullish catalyst to bring in new bulls at that level — perhaps bullish news for the stock or the market in general. Should this drive turn sour, keep your eye on the 50-day EMA. This level must hold support or all bullish bets are off. Failure to hold support would likely bring another test of the 200-day EMA.




Gary Grosschadl

Independent Canadian equities trader and technical analyst based in Peterborough
Ontario, Canada.

Website: www.whatsonsale.ca/financial.html
E-mail address: gwg7@sympatico.ca

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