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CHANNEL LINES


BTU In Bearish Mood

07/26/12 11:09:16 AM
by Chaitali Mohile

Peabody Energy Corp. has been moving in a long-term descending channel.

Security:   BTU
Position:   Hold

An intermediate uptrend of Peabody Energy Corp. (BTU) reversed to a robust downtrend in mid-2011. A rally took the price to $70. After that, the stock entered a fresh bearish trend, which gradually turned stronger, forming a series of lower lows and highs. These series formed a descending channel (Figure 1). Soon, the channel broke the 50-day and 200-day moving average (MA) supports. The declining price rally moved perfectly within the upper and lower trendline of the channel. BTU plunged below $25, losing almost 55 points from the top.

FIGURE 1: BTU, WEEKLY
Graphic provided by: StockCharts.com.
 
The downtrend indicated by the average directional index (ADX) (14) became overheated in the middle of the rally, highlighting the possibility of a trend reversal. However, the price rally did not change its direction; nor did it breach the upper trendline resistance. This reflected the bearish strength in the price rally. The full stochastic (14,3,3) was range-bound between 50 and 30 levels, suggesting weak momentum. The moving average convergence/divergence (MACD) (12,26,9) remained negative throughout the move. This scenario forced BTU to remain bearish and continue to fall. Currently, the downtrend is well developed, and hence the stock is likely to witness more downside.

FIGURE 2: BTU, MONTHLY
Graphic provided by: StockCharts.com.
 
On the monthly chart of BTU that you see in Figure 2, you see the descending channel as well. Since the oscillator is highly oversold, the stock is likely to move toward the upper trendline resistance at 30 levels. Earlier, an oversold stochastic had initiated strong bullish rallies. The other two indicators (MACD (12,26,9) and ADX) in Figure 2 also showed bullish reversal possibilities, which helped the stock to begin a fresh upward rally.

However, the current picture you see in Figure 2 is completely different. There, the MACD (12,26,9) is negative and the downtrend is developing, and thus, we cannot anticipate a bullish breakout of the descending channel. Although such types of breakout are major trend reversal signals, BTU is unlikely to undergo such a breakout in the current scenario. Since the stock has already plunged more than 50 points, short-term trading is possible with a target of $15. Traders can observe the price movement near support levels before finalizing their future plan of action.

To conclude, BTU would continue to move within the descending channel. Currently, a bullish breakout has not appeared on any of the charts.



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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