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DOUBLE BOTTOMS


Dell On Sale, 50% Off

03/06/08 11:55:56 AM
by Gary Grosschadl

We love buying big-ticket items on sale, but stocks offered at a big discount are sometimes viewed as not worth it. Will the stock be discounted even more?

Security:   DELL
Position:   Buy

In its heyday year of 2000, the days of irrational exuberance, Dell Inc. peaked near $60. Then the stock crashed to $16 in the market meltdown by 2001. By 2005, the stock climbed back to a peak of $43.
A new downtrend to below its 200-period moving average culminated in a bottoming move to $20 in 2006. Two years later, the stock is once again on sale at less than half of its 2005 peak.

This multiyear weekly chart (Figure 1) suggests a possible large double-bottom formation. The symmetry is not ideal, with the peak move to $30 being off-center, but this does not preclude a double-bottom attempt. For a double bottom to be confirmed, it would have to rise boldly above the $30 level with a target of $40 (with a distance from bottom to peak as applied above the peak). However, a more prudent trading target would factor in the ever-important 200-period exponential moving average (not to mention a slowing economy). With this in mind, the trading target is a failure move to overhead resistance, a mere test of a double bottom, a target zone encompassing the near $31 peak, the 200-day EMA (currently 30.34) and a previous resistance level of $28.

FIGURE 1: DELL, DAILY. Dell is testing a previous bottom — will enough bargain-hunters step in to drive the stock higher?
Graphic provided by: StockCharts.com.
 
Several indicators are considered. At the top of the chart, the ADX line (average directional movement index) is getting overheated above both DIs (directional indicators). This could be at or near a peak for the ADX. If so, a change in trend could be coming. Below the chart, the MACD (moving average convergence/divergence) line is just crossing above its signal line. An upturn from a very low level hints at a possible reversal. The same idea is offered from the RSI (relative strength index). Support at the 30 level is also considered.

Meanwhile, the stochastic oscillator cautions that although this is an oversold condition, an upturn above the 20 level on this graph is needed before a stochastic up leg can be pondered.

In summary, the stock will likely try to bounce off this previous bottom level established in 2006. A full-blown double-bottom pattern is unlikely, but a failure move to overhead resistance could be tradable for the intrepid trader. This stock is not for the faint of heart or risk-averse.




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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Date: 03/06/08Rank: 5Comment: 
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