Filling The Gap

02/28/13 12:32:32 PM

by Koos van der Merwe

Meg Whitman, President and CEO of Hewlett-Packard was interviewed on CNBC last week.

Security: HPQ
Position: Sell

Hewlett Packard (HP), like all computer companies, has fallen on hard times as buyers have moved from buying computers to buying tablet computers. Retail prices for computers and laptops have fallen dramatically affecting profits. Companies have been racking their brains to develop a competing product and boost profitability. Dell, Inc. (DELL) is likely to become a private entity, which means it will be delisted. Other computer companies such as Microsoft Corp. (MSFT) and Apple, Inc. (AAPL) have had their share prices fall. Shares of HP however, rose dramatically while Meg Whitman was being interviewed. The question now arises, "Is Hewlett-Packard worth a buy?"

Figure 1. Monthly Chart

Graphic provided by: AdvancedGET.

The monthly chart of HP in Figure 1 shows how price fell as the technology bubble burst from a high of $68.23 in July 2000 to a low of $11.16 by October 2002. Price then rose to form a double top on November 2007 and April 2010 at $53.31 and then fell on an RSI divergence sell to a low of $11.43 by November 2012. The RSI indicator is currently suggesting a buy, but it also suggested a buy in October 2011 and the share price fell further. Would you be a buyer now?

Figure 2. Weekly Chart

Graphic provided by: AdvancedGET.

The Elliott wave count on the weekly chart in Figure 2 suggests that price may have bottomed at $11.43 on November 2012 in a Wave C. The RSI indicator has given a buy signal, but looking at its history, it has given buy signals on previous wave counts and then fallen as the price fell back into the oversold zone. Therefore, you will have to question whether the buy signal is an accurate one. The Elliott wave count does follow the first rule of Elliott, that is, the count must look correct so the rise could be a rise in a Wave 1.

Figure 3. Daily Chart

Graphic provided by: AdvancedGET.

The daily chart in Figure 3 shows the gap that occurred on February 21, 2013 when Meg Whitman was interviewed. As you can see from the chart, when gaps form, prices usually rise or fall to fill a gap. Hence, it is likely that price will fall to fill the gap shown. This could see the price drop to $17.24 or lower. The RSI indicator is overbought but has not yet given a sell signal. Note the buy and sell signals given by the JM internal band indicator. The JM internal band is a 15-period simple moving average offset by 2% positive and 2% negative. A buy is given when the closing price breaks above the upper band. A sell price is given when the closing price breaks below the lower band.

I would not be a buyer of HP at the current price. I would wait for the gap to be filled (prices to fall), the RSI to be oversold, and for the RSI to suggest a buy signal.

Koos van der Merwe

Has been a technical analyst since 1969, and has worked as a futures and options trader with First Financial Futures in Johannesburg, South Africa.

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Filling The Gap

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