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CHART ANALYSIS


Amex Composite On Reverse Journey?

10/20/10 01:24:32 PM
by Chaitali Mohile

Amex Composite has hit near-term resistance. Will the index go through a serious correction, resulting in a trend reversal?

Security:   $XAX
Position:   Sell

The Amex Composite ($XAX) geared up a bullish rally with the support of the 50-day moving average (MA) in September 2010. After climbing 100 points from the support, $XAX formed a long upper shadow candle with a small real body -- a shooting star (see Figure 1). Although the shooting star candlestick is a bearish reversal pattern that indicates a top formation in a particular stock or index, $XAX has continued its journey. The trend indicator, average directional index (ADX) (14), and the full stochastic (14,3,3) were not in sync with the candlestick formation. The uptrend was developing and the stochastic surged, establishing support at 50 levels. Since the indicators were in a bullish mood, the shooting star failed to terminate the rally. Later, another shooting star was formed with an intraday high above 2100 levels. We can see that both the shooting stars have the same high pivot (see the dotted line in Figure 1). Therefore, the long upper shadows have generated robust resistance above 2100 levels, and as a result, the index moved sideways.

FIGURE 1: $XAX, DAILY
Graphic provided by: StockCharts.com.
 
During the consolidation, $XAX formed doji candlesticks, suggesting the possibility of a reversal rally. This time, the momentum oscillator is tipped down and ready to plunge along with the price action and the uptrend also is likely to descend. Thus, the index would retrace toward its immediate support of the 50-day MA, losing around 100 points.

FIGURE 2: $XAX, MONTHLY
Graphic provided by: StockCharts.com.
 
According to the monthly time frame seen in Figure 2, $XAX has recently witnessed a bullish MA breakout. The 50-day MA resistance is converted to support. After the breakout, the index hit the 61.8% Fibonacci retracement levels. The stochastic oscillator is shaky in the highly overbought area above 80 levels. The downtrend indicated by the ADX (14) in Figure 1 has turned weaker and shows the possibility of consolidation. The stock enters consolidation if the buying pressure reflected by the positive directional index (+DI) and the selling pressure shown by the negative directional index (-DI) are converging as well as if the ADX line slips below 20 levels. Therefore, $XAX is likely to move sideways between the 61.8% and the 50% Fibonacci retracement levels.

Thus, the short-term correction of $XAX would lead to a consolidation in the long term.



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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