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HEAD & SHOULDERS


Let Us Look at Lucent

01/20/03 12:11:42 PM
by Koos van der Merwe

Lux means light in Latin, but things have not been bright for Lucent. How does it shine today?

Security:   LU
Position:   Hold

When you look at the chart below, the first thing that strikes you are the three cup and handle formations. I have labeled them A, B and C. Then you notice the strong resistance line, E-F which has successfully acted as a barrier to a rising price three times. Then finally, you see an inverse head and shoulders formation, with E-F as the neckline. Surely the chart is telling us something profound?

1. There are two formations, the inverse head and shoulders formation and the cup with handle, suggesting a strong resistance at the same level.

2. Calculating the target using the inverse head and shoulders formation, I find that Lucent could rise to $3.46, should it break above the neckline of $1.98.

3. Looking at the right shoulder of "C" and determining a target using a cup and handle formation, I calculate a target of $2.73.

4. Finally, the chart shows how Lucent has tested the main resistance line E-F three times. Testing it for the fourth time is usually difficult, as the line becomes more solid with each test, but when eventually broken, the result can be dramatic.

5. I would buy the share should it break above $1.98. My risk reward ratio of 2.5:1 makes it a profitable buy. I calculate it as follows. My stop-loss would be 10% of 1.98, which comes out to 0.20. Then subtracting 0.20 from 1.98 gives me a 1.78 stop-loss. This means that my target should exceed $0.50. My reward would be $1.45 ($3.46 - $2.01) if the head and shoulders target is reached. If the cup and handle target is reached, my reward is $0.75. In both cases my reward exceeds my risk by more than 2.5.


Figure 1: Lucent a future star?
Graphic provided by: AdvancedGET.
 
I will now place Lucent on my watch list, and wait for a break above $1.98 before buying. I will expect the share price to rise to $2.73, (the cup and handle target), consolidate at this level, and then continue rising to take out the target at $3.46.



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.

Address: 3256 West 24th Ave
Vancouver, BC
Phone # for sales: 6042634214
E-mail address: petroosp@gmail.com

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