Uptrend Ends For Swift Energy

11/11/08 11:53:28 AM

by Chaitali Mohile

Swift Energy witnessed a trend reversal with the failed breakout of a bullish pattern. Is the stock likely to enter a new downtrend?

Security: SFY
Position: N/A

Swift Energy (SFY) was in a robust uptrend since 2003. The bullish rally continued for almost three years. The relative strength index (RSI) (14) and the moving average convergence/divergence (MACD) (12,26,9) also rallied to highly bullish areas. In addition, the average directional movement index (ADX) (14) indicates an overheated uptrend after the extensive upward rally. All the three indicators declined to create room for a future bullish rally. The RSI (14) established support at 50, the MACD (12,26,9) stabilized in positive territory, and the ADX (14) declined, indicating the developing uptrend. SFY thus entered a long consolidation in 2006, that lasted for two years.

The picture during consolidation was highly bullish, accompanied by healthy volume. This indicated that traders were very positive toward the upside breakout of the pattern. The bullish flag & pennant is a bullish continuation pattern and breaks in the direction of the existing uptrend. The bullish flag & pennant pattern in Figure 1 can be considered to be highly reliable since the time period for the pattern formation is long. The pattern broke at 50 on encouraging volume. SFY surged to 70, making an all-time high. The target for the breakout rally is 50 - 10 = 40, the length of the flag pole, and 40 + 50 (breakout level) = 90. So SFY had a long way to travel above 70, but the indicators were reluctant. The stock made a new high, but the RSI (14), and the MACD (12,26,9) had a negative divergence. The uptrend failed due to low buying pressure indicated by positive directional index (+DI) of ADX (14).

FIGURE 1: SFY, MONTHLY. The bullish flag & pennant breakout failed to achieve the target of 90. The rally reversed from the 70 level, indicating a trend reversal.

Graphic provided by: StockCharts.com.

The breakout rally failed, indicating major trend reversal signs. SFY slipped below the consolidation support at 40 on bearish notes. Currently, the RSI (14) in Figure 1 is not oversold, so the stock has more downside. The MACD (12,26,9) is at a crucial support level of the zero line; if the indicator slips into negative territory, SFY may see further selling pressure. The ADX (14) shows the weak trend, which can drag the stock toward the lower support at 20. Eventually, the selling pressure would increase, initiating a new downtrend.

The uptrend reversed as SFY plunged from 70 to 28. The chart suggests a fresh downtrend under way if the previous low at 20 is retested. The stability of the new bearish trend should be watched as the major indexes are rangebound with high volatility. Therefore, a new short can be triggered only in the developing downtrend or below 20.

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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Uptrend Ends For Swift Energy

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