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CHART ANALYSIS


Accuray In Bearish Pressure

04/07/10 10:07:10 AM
by Chaitali Mohile

The technical charts of Accuray are filled with bearish indications. The consolidation at lower levels may result in additional loss for the stock.

Security:   ARAY
Position:   Sell

In February and March 2010, respectively, $7.30 and $7.75 were the two consecutive intraday highs made by Accuray Inc. (ARAY). Due to the weak bullish strength reflected by the relative strength index (RSI) (14), ARAY dropped to $6.77. An upward rally from this support surged higher, but the RSI (14) didn't. The oscillator formed lower highs, indicating a negative divergence, halting the price rally temporarily. In addition, the candlestick that made the high at $7.75 had a long upper shadow and small bullish real body, forming a shooting star. This single candlestick pattern suggests formation of a top and initiates a fresh bearish rally. In Figure 1, we can see a black box with the shooting star candlestick followed by a bearish candle. The later candlestick is a hanging man pattern -- a bearish reversal formation. Thus, the negative divergence, the shooting star, and the hanging man candlestick pattern reversed the uptrend of ARAY to the bearish trend.

FIGURE 1: ARAY, DAILY. The stock formed the bearish flag & pennant by consolidating at a lower level.
Graphic provided by: StockCharts.com.
 
The 50-day moving average (MA) support was violated by a small gap down opening on March 23 (see black arrow). Thereafter, the bearish force surged, increasing the selling pressure of the average directional movement index (ADX) (14). The trend indicator gradually moved above 20 levels, indicating a developing downtrend in Figure 1. Another robust bearish indication appeared on the daily time frame as the 200-day MA support was breached. After converting this major support into resistance, ARAY consolidated, forming a bearish flag & pennant formation. The ADX (14) shows the developing downtrend, and therefore, the formation is considered to be a bearish continuation pattern with potential breakout in a downward direction. Although the entire financial market is undergoing a bullish rally, ARAY is likely to underperform due to bearish technical conditions.

The downside breakout would meet the target of 6.70 - 6.25 = 0.45 - 6 = 5.55. The breakout could be a good short selling opportunity for short-term traders. Due to the volatility during consolidation, the 200-day MA resistance may be challenged. However, the resistance would not be violated until the buying pressure is generated and the downtrend is reversed.

FIGURE 2: ARAY, WEEKLY. Since mid-2008, the gap between the MACD line and the trigger line has disappeared, indicating high volatility during the entire price rally of ARAY. The MACD (12,26,9) is zigzagging in positive territory and is flirting with the zero line.
Graphic provided by: StockCharts.com.
 
The dotted line in Figure 2 shows a robust resistance near $8. The lower lows in 2008 and the higher lows in 2009 constructed an inverted head & shoulders formation. The three red arrows highlight the pattern. The pattern has not yet broken out above the neckline resistance at 8. Instead, ARAY failed to breach the resistance and plunged below the 50-day MA support in March 2010. The ADX (14) clues consolidation due to the weak trend; see the big block in Figure 2. The RSI (14) is shaky near the center line (50 levels), indicating pressure from bulls as well as from bears on the price rally.

Thus, due to the 50-day MA resistance on the weekly time frame and the bearish flag & pennant formation in Figure 1, ARAY would remain under bearish pressure and witness further drops in the price levels.



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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Date: 04/07/10Rank: 3Comment: 
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