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CHART ANALYSIS


Hitachi Is Oversold

02/06/09 08:29:54 AM
by Chaitali Mohile

Hitachi may be open to attractive buying opportunities.

Security:   HIT
Position:   Buy

After violating the support at $60 area, Hitachi Ltd. (HIT) entered a fresh downtrend indicated by the average directional movement index (ADX) (14). The relative strength index (RSI) (14) that was moving within the narrow range of 30 and 50 slipped in an oversold area. With every declining price, the momentum indicator gained the bearish strength and the downtrend turned stronger. As a result, HIT plunged to its low of $30.

FIGURE 1: HIT, WEEKLY. All three indicators are highly bearish.
Graphic provided by: StockCharts.com.
 
Currently, the ADX (14) is highly overheated, the moving average convergence/divergence (MACD) (12,26,9) has moved deep into its negative zone, and the RSI (14) is heavily oversold. Such bearish conditions may generate a fresh bullish rally in the downtrend. The ADX (14) may decline from the overheated levels, but the downtrend may not reverse immediately. To begin a new uptrend, the positive directional index (+DI) should surge above the negative directional index (-DI). In Figure 1, the +DI and the -DI are poles apart, and therefore the fresh uptrend is not indicated. The stock has already begun its upward journey. Additional buying pressure can be seen above the week's high of $31.49.

FIGURE 2: HIT, DAILY. The stock is likely to violate lower trendline resistance.
Graphic provided by: StockCharts.com.
 
The two converging trendline in Figure 2 shows the falling wedge bullish reversal pattern. Technically, this pattern breaks upward. But for HIT, the lower trendline is breached with a gap down. The second gap down formed a doji, indicating indecision and confusion among traders. Meanwhile, an oversold RSI (14) surged above 30 levels, indicating upcoming bullish strength. The hammer candlestick pattern was another bullish indication in Figure 2. The gap down resistance was filled by this candlestick pattern. The candle marked in a circle in Figure 2 indicated a hammered downtrend. The ADX (14) is indicating a declining selling pressure that may enhance the bullish strength.

Considering the hammer and an oversold RSI (14), the rally is likely to convert the lower trendline resistance to support. The newly formed support can be a good entry point with the target of an upper trendline. However, a tight stop-loss is necessary as the trend is bearish.

Thus, the highly oversold indicators may give birth to a relief rally in the current downtrend.



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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