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RETRACEMENT


Lubrizol Stalls At Key Retracement

03/13/08 09:01:23 AM
by Arthur Hill

After stalling within a key retracement zone, downside volume is picking and Lubrizol looks like it is putting in a high.

Security:   LZ
Position:   Sell

Lubrizol (LZ) broke down in December 2007–January 2008, and the bounce back to 60 looks like a corrective rally. Why do I think this? First, the decline broke key support. Second, the stock easily broke below the 200-day moving average. Third, the 200-day moving average turned down over the last few weeks. These three items point to an overall downtrend. The stock became oversold after the December–January decline and the bounce alleviated this condition. See Figure 1.

FIGURE 1: LZ, DAILY. Lubrizol broke below the 200-day moving average, eventually leading to a downtrend.
Graphic provided by: TeleChart2007.
 
There are also reasons to suggest that the current bounce is just a corrective bounce. First, the 200-day moving average turns from support to resistance. The stock hit the 200-day in early February and stalled the last few weeks. Second, the advance retraced 50–62% of the prior decline. This is typical for corrective advances or countertrend rallies. See Figure 2.

With the stock stalling at resistance, I decided to take a closer look at price, volume, and momentum. The stock stalled throughout February and then declined sharply four days ago. This decline was on above-average volume. It looks like selling pressure is picking up. The stock managed to recover and there is support around 56. Look for a break below this consolidation to signal a move lower.

FIGURE 2: LZ, DAILY. Or is the current bounce just corrective? The stock stalled throughout February and then declined sharply.
Graphic provided by: TeleChart2007.
 
The bottom indicator shows the moving average convergence/divergence (MACD). As the stock trades flat, the MACD gravitates back to the zero line (midpoint). A cross into negative territory would turn momentum bearish and this could be used to confirm a support break in the stock. A move above the MACD signal line (pink) would call for a reevaluation. In addition, a break above consolidation resistance would also call for a reevaluation.



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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