Volcano Corp. Hits Resistance

09/11/08 09:10:02 AM

by Chaitali Mohile

Uptrending Volcano Corp. has rallied to the previous high resistance. Will the stock consolidate or correct?

Security: VOLC
Position: N/A

The negative divergence on the stochastic oscillator (14,3,3) may have weakened the bullish rally of Volcano Corp. (VOLC) in 2007. VOLC declined from 23 to 15, and established the support to regain the bullish rally. Accordingly, the price rallied back to 19, but due to lack of strength the stock failed to sustain above the 50-day moving average support (MA) (see Figure 1). Then VOLC had a nosedive to 11 and formed a rounded bottom, indicating trend reversal. The rounded bottom indicates possible reversal of an existing downtrend to an uptrend. The pattern is confirmed when price breaks out above its moving average.

FIGURE 1: VOLC, WEEKLY. The ADX (14) shows a developing uptrend. The rounded bottom changed the downtrend to an uptrend.

Graphic provided by: StockCharts.com.

The stochastic (14,3,3) surged above the 20 levels, forming higher highs and higher lows. Price also surged above the 50-day MA resistance, confirming the rounded bottom reversal pattern. The stock thereafter rallied toward the previous high at 19. This breakout journey failed to attract maximum traders, and as a result, the rally exhausted near the high. The long spikes of the candles indicate nervousness among traders. In Figure 1, we can see that the stochastic (14,3,3) was not comfortable in the overbought zone at 80, and therefore it is positioned to decline. But the declining oscillator may not have an adverse effect on the price till the bullish levels are maintained.

In Figure 2, the moving average crossover was the first bullish indication after a long correction phase. The 50-day MA crossed the 200-day MA from below and moved north. The price movement converted the 200-day MA resistance to support and climbed the upper levels. In Figure 2, we can see a small bullish flag formed in the narrow range after the advance rally of $1.50. The breakout rally was difficult to trade as the breakout rushed to the target level in one single day. Such rallies cannot be boarded midway. The stock gradually followed the 50-day MA with moderate volume and soon reached the previous high at 19. Many times, under the previous high resistance, the stock retraces back to lower levels. In Figure 1, we can see the shooting star reversal candlestick formed at the top of the rally. The upper shadow marked the new high at 19.50.

FIGURE 2: VOLC, DAILY. The MACD (12,26,9) shows the bullish crossover in July 2007. Later, as the price hit the previous high resistance the MACD moved below the trigger line in positive territory.

Graphic provided by: StockCharts.com.

The shooting star is a trend reversal pattern. In Figure 2, the existing rally stopped with the shooting star, and the next two trading sessions were bearish. But the third session on September 4, 2008, was a bullish day. The bullish candle engulfed the previous two bearish candles. This shows that the stock was not in a mood to give up the rally, but the previous high restricted the upside movement. Therefore, VOLC is likely to consolidate in such conditions.

The descending stochastic oscillator (14,3,3) established support at the 50 bullish level and is ready to surge. The moving average convergence/divergence (MACD) (12,26,9) shows a bearish crossover in positive territory. In addition, the average directional movement index (ADX) (14) has an overheated uptrend above the 40 level. Though the indicator may decline, the uptrend would sustain. This indicates that the stock has not turned completely bearish. Under this scenario, the stock might consolidate. I would recommend traders book profits and wait for the next bullish breakout. I would suggest keeping a tight stop-loss because the current volatility might give a false breakout and could whipsaw you.

Chaitali Mohile

Active trader in the Indian stock markets since 2003 and a full-time writer. Trading is largely based upon technical analysis.

Company:	Independent
Address:	C1/3 Parth Indraprasth Towers. Vastrapur
	Ahmedabad, Guj 380015
E-mail address:	chaitalimohile@yahoo.co.in
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TECHNICAL ANALYSIS

Volcano Corp. Hits Resistance

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