Ralcorp Bucks The Bears

11/14/08 09:38:41 AM

by Arthur Hill

The pickings are slim during a bear market, but Ralcorp is bucking the bear with relative strength and a bullish engulfing on high volume.

Security: RAH
Position: Accumulate

Figure 1 shows Ralcorp (RAH) with weekly candlesticks over the last 15 months. The stock broke resistance with a big move in August–September and then embarked on a consolidation the last several weeks. Like the overall market, this consolidation has been rather choppy. Even though the stock is battling its resistance break, the bulk of the gains from the prior advance are holding and this stock shows strength.

FIGURE 1: RAH, WEEKLY. The stock broke resistance with a big move in August–September 2008 and then embarked on a consolidation.

Graphic provided by: TeleChart2007.

After a big advance, the stock is entitled to a rest and the triangle represents such a rest. It is basically a neutral consolidation that is dependent on a break for the next directional signal. A move above triangle resistance would signal a continuation higher, while a move below support would argue for a correction.

Figure 2 shows daily candlesticks over the last four months. Instead of a triangle, the consolidation looks flatter with support around 59 and resistance around 71. Overall, the trend is up as the rising 50-day remains above the rising 200-day. In addition, the stock formed a big bullish engulfing pattern on strong volume (blue oval). This long white candlestick formed when the overall market was down sharply, which is another show of relative strength. This pattern reinforces support and targets a resistance challenge around 71.

FIGURE 2: RAH, DAILY. Instead of a triangle, the consolidation looks flatter with support around 59 and resistance around 71.

Graphic provided by: TeleChart2007.

The bottom indicator window shows the price relative, which compares the performance of RAH against the Standard & Poor's 500 exchange traded fund (ETF) (SPY). The price relative moves from the lower left to the upper right for a nice uptrend that shows relative strength. RAH is outperforming the overall market and this makes the stock attractive to portfolio managers required to own stocks.

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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