Fluor's Descending Triangle

01/21/02 01:16:24 PM

by David Penn

Reduced spending by the Calpines and Enrons is bad news for power plant construction and service companies like Fluor.

Security: FLR
Position: N/A

Given the short signal issued by the QQQs on December 14th (see "Zweig's Four Percent Solution", January 14, 2002, Traders Advantage) and the stubbornly enduring long signal in the DIA from October 8th, I have been paying more attention to short opportunities among the Nasdaq 100 stocks than anywhere else. However the disappointing earnings and likely resumption of the primary bear market trend have widespread effects not limited to the companies of the Nasdaq 100.

One example of this is Fluor Corporation. Fluor (FLR) has been in a significant downtrend since May 2001. The stock fell from about 63 to establish a bottom just north of 35 in July. After a short, sharp rally, that bottom was again tested in September. In fact, the rally from the successful test took FLR up to about 47, somewhat higher than the rally that followed the initial July 2001 bottom. Unfortunately for Fluor bulls, prices began retreating immediately from the intermediate October peak, establishing a series of lower highs while at the same time finding solid resistance at 35.

Fluor's bottoming process looks vulnerable to further declines should this descending triangle breakdown.

Graphic provided by: MetaStock.

This price action has Fluor Corporation developing a descending triangle formation. The descending triangle is a continuation formation that can occur during a downtrend as a bear market rally gives way to a rest of the bear market low. The defining characteristic of descending triangles is a downward sloping resistance trendline that guides highs lower, along with a horizontal support line that has been repeatedly and successfully tested.

What fuels the "coil" that eventually results in a breakout (up) or breakdown (down) is the repeated successful tests of support at the bottom combined with the ever-lowering resistance level at the top. As prices get squeezed by the converging trendlines, price ranges get narrower and narrower until it becomes easier for bull or bears -whichever group feels more confident on the eventual outcome - to make a bet on the stock's likely direction. Those bets are what cause the breakout.

The top of the descending triangle in FLR is at 47, with horizontal support at 35. The measurement rule for descending triangles calls for subtracting the formation height from the value at the support area. This yields a likely downside target of 23: formation size (12) subtracted from the support value (35). Although not shown on the chart provided, there is significant support in the mid-low 20s - if for no other reason than the fact that FLR would be revisiting historic lows at that point. Intermediate support, albeit limited, would first be encountered around 30, should a breakout occur.

David Penn

Technical Writer for Technical Analysis of STOCKS & COMMODITIES magazine, Working-Money.com, and Traders.com Advantage.

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DESCENDING TRIANGLES

Fluor's Descending Triangle

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