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CONSOLID FORMATION


Two Diamonds For Autozone

04/18/08 10:36:50 AM
by Arthur Hill

Autozone broke above diamond resistance on the daily chart, but faces stiffer resistance from an even bigger diamond on the weekly chart.

Security:   AZO
Position:   Accumulate

Diamond patterns represent large consolidations. The first half forms with a broadening type formation, while the second half forms with a symmetrical triangle. As the name implies, a contracting range follows an expanding range. This contracting side of the pattern reflects lower volatility. Technically, the trend is flat as long as the diamond pattern holds. The direction of the break decides the bullish or bearish bias.

FIGURE 1: AZO, DAILY. Here's a diamond pattern with daily candlesticks.
Graphic provided by: TeleChart2007.
 
Figure 1 shows the diamond with daily candlesticks. After a sharp decline in December 2007–January 2008, the stock rebounded and then went into consolidation mode. The blue trendlines trace out a diamond over the last two and a half months. With a surge over the last five days, AZO broke diamond resistance, and this is bullish. Based on the two prior highs, I would mark a target zone around 127–133. Failure to hold this breakout and a move below the lower trendline (115) would be bearish.

FIGURE 2: AZO, WEEKLY. Here, the upper trendline marks resistance around 126, which also corresponds with the February high.
Graphic provided by: TeleChart2007.
 
Figure 2 shows a larger diamond with weekly candlesticks. The upper trendline marks resistance around 126, which also corresponds with the February high. A break above this level would be the second bullish signal and argue for further upside. While there is resistance around 133 from the February higher, this second upside target would be near the July high around 140.



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
Company: TDTrader.com
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E-mail address: arthurh@tdtrader.com

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