A Descending Triangle For Capital One

11/07/08 09:01:29 AM

by Arthur Hill

After breaking down in September, Capital One Financial formed a descending triangle over the last five weeks, and a continuation lower is likely.

Security: COF
Position: Sell

Figure 1 shows Capital One Financial (COF) in a long-term downtrend. First, the 50-day moving average is below the 200-day moving average. Second, the stock is below the 200-day moving average. Third, the 200-day moving average is falling. Even though trading may appear relatively flat on the price chart, the moving average dynamics point to a long-term downtrend.

FIGURE 1: COF, DAILY. Capital One Financial appears to be in a long-term downtrend.

Graphic provided by: TeleChart2007.

COF established resistance around 58 in the first half of the year and even broke to new highs in September. However, this breakout failed miserably as the stock came crashing down in September. The stock found support from the July lows and consolidated the last few weeks. The resolution of this consolidation will trigger the next signal.

A closer look at the consolidation reveals a descending triangle taking shape. The stock advanced on low volume and formed a lower high in early November. The October lows are relatively equal and the blue lines show a descending triangle. With a bearish continuation pattern, a break below support would signal a continuation of the long-term downtrend. See Figure 2.

FIGURE 2: COF, DAILY. Is a descending triangle taking shape?

Graphic provided by: TeleChart2007.

The moving average convergence/divergence (MACD) is running into resistance as downside volume surges. The stock declined sharply on November 6 with the highest volume since mid-October. Selling pressure is expanding and this is negative. The MACD bounced back to the zero line as the stock consolidated and I view this as resistance. A move back below the signal line would trigger a bearish momentum signal. Note how the zero line acted as support during the July–September advance. The opposite is happening now.

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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