A Breakdown For Brinker

08/28/08 09:02:30 AM

by Arthur Hill

After breaking channel support with a gap, Brinker International is now challenging head & shoulders support, and a break here would extend the long-term downtrend.

Security: EAT
Position: Hold

Figure 1 shows Brinker International (EAT) over the last five months. The stock declined sharply from May to early July and then retraced 62% of this decline. The retracement advance formed a rising channel and the stock broke channel support with a gap down. The retracement and the channel are typical for corrective advances and the recent breakdown argues for a continuation of the May–June decline.

FIGURE 1: BRINKER, DAILY. Over the last five months, EAT declined sharply from May to early July and then retraced 62% of that decline.

Graphic provided by: TeleChart2007.

Mind the gap. The gap and support break are valid as long as they hold. In other words, this signal should hold. A move above the gap would challenge the support break, and further strength above the red resistance line (19.6) would negate this support break. Such a move would call for a reassessment.

A bigger bearish pattern is unfolding on the weekly chart (Figure 2). After a sharp decline in 2007, EAT firmed and consolidated in 2008. However, the consolidation pattern traced out a head & shoulders pattern. Because the prior move was down, this head & shoulders is considered a continuation pattern. A move below neckline support would confirm the pattern and signal a continuation of the long-term downtrend.

FIGURE 2: BRINKER, WEEKLY. On the weekly chart, a bigger bearish pattern is unfolding.

Graphic provided by: TeleChart2007.

For a downside projection, the height of the pattern is subtracted from the neckline break. The pattern extends from 16 to 24, which makes the height eight points (red dotted line). A neckline break at 16 would target further weakness toward eight.

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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HEAD & SHOULDERS

A Breakdown For Brinker

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