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BREAKOUTS


IBM Remains Healthily Bullish

08/03/11 10:22:09 AM
by Chaitali Mohile

The long-term bullish breakout is at the middle of its journey. The price actions and indicators signify steady rally toward the target.

Security:   IBM
Position:   N/A

An advance rally of IBM violated an intermediate resistance at $171 levels in June 2011. The three long bullish candles reversed a weak trend to an uptrend in Figure 1. The uptrend continued to surge but price turned sideways, challenging the newly formed support at $171 levels. The consolidation formed a bullish flag & pennant formation that broke upward with a small gap. The yellow block in Figure 1 shows the long white candle, indicating the strength of the bullish breakout. The single session gained almost $5 during the breakout. Since the relative strength index (RSI) (14) formed a double top, a bearish reversal formation, on the daily chart, IBM turned volatile at the new high of $185. We can see the small doji candlesticks and the red/white candles with long upper shadows in the yellow block. Gradually, the stock began losing its previous intraday gains.

FIGURE 1: IBM, DAILY
Graphic provided by: StockCharts.com.
 
Currently, the stock has plunged to $178 levels and is ready to breach the low formed by the bullish candle. The gap that was formed by the breakout is likely to get filled. The overheated average directional index (ADX) (14) is declining to a developed uptrend region at 35 levels. The RSI (14) has drifted to 51 levels, signifying diminishing bullish strength. Therefore, to sustain the bullishness of the rally, the indicator has to establish support at the center line (51). The descending price rally would rest after filling the gap if both indicators maintain their bullish level. IBM has the strong support at $175 and below that, $171.

FIGURE 2: IBM, MONTHLY
Graphic provided by: StockCharts.com.
 
The monthly chart of IBM shows support-resistance at $121. The rally that began at $65 established support at $121 levels and consolidated for more than six months. A bullish flag & pennant formed due to the sideways price action. Price underwent a robust breakout in October 2010. I mentioned the target of $189 in my article dated September 9, 2010 ("IBM At All-Time High"). This long-term breakout rally has reached $178, and the indicators in Figure 2 suggest a steady rally toward the target.

The overbought RSI (14) at 77 levels is indicating bullish strength, and the moving average convergence/divergence (MACD) (12,26,9) turned positive after a bullish crossover at the zero line. In addition, the uptrend is developing in Figure 2. Thus, the bullish journey of IBM would definitely reach the target of $189 levels (130 - 75 = 55 + 134 = 189) in the long term. Due to shrinking volume, future movement is likely to be a little slow. Traders with long positions can hold on to their positions and those waiting on sidelines can trigger their trade at current levels.

Thus, IBM would remain healthy in the near future as well. The ongoing corrective rally is a good buying opportunity for fresh traders and investors.



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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