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WEDGE FORMATIONS


Two Wedges For Two Titans

04/08/04 12:04:16 PM
by Arthur Hill

The current trend is bullish for both IBM and GE, but current patterns and retracements merit a close watch.

Security:   IBM, GE
Position:   Sell

IBM and GE are both Dow Industrials components and large-cap stocks that weigh heavily in the S&P 100 and S&P 500. Because the Dow is a price-weighted average, higher priced stocks carry the most weight. As such, IBM (low 90s) exerts a much greater influence on the Dow than GE (low 30s).

Figure 1: Daily chart of IBM.
Graphic provided by: MetaStock.
 
After a steep decline in the first nine months of 2002, IBM bounced sharply in the third quarter and then worked its way higher in 2003. The resulting pattern looks like a rising wedge that retraced 62% of the prior decline. Both the pattern and the retracement are typical for bear market rallies. As long as the lower trendline holds, the bulls reign. A move below the lower trendline and November lows (green line) would turn the trend bearish again.


Figure 2: Daily chart of GE.

Although not exactly identical, GE also sports a rising wedge. The stock declined from 60.5 to 21.3 (Sep-00 to Feb-03) and then retraced just under 38.2% with a rising wedge advance over the last 12 months. Notice that broken support around 35 turned into resistance. A move below the lower trendline and November low (green line) would signal a continuation lower and turn the trend bearish again.

Both wedges (advances) formed on relatively low volume and further upside could be limited by a lack of fuel. Volume in IBM was strong in early 2003, but peaked in June (red arrow) and has been slowly declining as the stock works its way higher. An advance on low volume is not healthy. GE declined on heavy volume in 2002 and the volume levels in 2003 remain below those seen a year earlier. GE experienced a volume surge over the last few weeks, but most of it was on the downside.



Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

Title: Editor
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E-mail address: arthurh@tdtrader.com

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