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CHART ANALYSIS


IYM In Converging Range

09/13/13 03:26:11 PM
by Chaitali Mohile

Basic Materials iShares ETF is likely to drain down.

Security:   IYM
Position:   N/A

Basic Materials iShares (IYM) has clearly been in a bearish trend and although it looks like it is recovering, signs point to more downward pressure. After establishing support at 50 levels, the index moved upwards, forming higher lows and higher highs. Since early 2012, IYM has been moving in the tapering range on weak notes. The index formed a long-term rising wedge — a bearish reversal pattern — on the monthly time frame chart in Figure 1. The two converging trendlines formed by the series of higher highs and higher lows are likely to intersect soon, resulting in a bearish breakout of IYM.

Figure 1: Monthly chart for IYM.
Graphic provided by: StockCharts.com.
 
This weakness would further narrow the trading range of IYM. The relative strength index (RSI)(14) is ranging in the bullish area between 50 and 70 and the full stochastic(14,3,3) is near an overbought region. These conditions would add volatility in the converging range. Look for IYM to breach the lower trendline support as well as the ascending 50-day moving average (MA) support.

On the weekly time frame chart in Figure 2, IYM is moving comfortably within the two converging trendlines. These support-resistance lines have offered short-term buying and selling opportunities to traders. In the past year and a half, IYM has respected both trendlines. Due to the weak trend indicated by the ADX(14), the index could not violate either of the trendlines.

The buying pressure (green line) and selling pressure (red line) of the trend indicator are converging frequently with the ADX line below 15 levels. This suggests high volatility and directionless rally for IYM. In addition, the RSI(14) and the stochastic oscillator are zigzagging in an oversold and overbought region. Therefore, IYM is likely to continue its rally within the wedge till a strong bearish pressure is developed.

Figure 2: Weekly chart for IYM.
Graphic provided by: StockCharts.com.
 
Currently, IYM is ready to retrace once again toward its lower trendline support. Although the distance is short, traders can take advantage of this trading opportunity for a short time with the target of the trendline and the 200-day moving average (MA) support. Look for the index to keep on shifting from lower to upper trendlines till the rising wedge formation matures and initiates a bearish breakout.

To conclude, IYM is forming a long-term rising wedge pattern which could break downward in the near future.



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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