Figure 1: Weekly chart of Morgan Stanley.
The weekly chart offers a nice perspective of the last four years. The stock declined from 110 to 29 and then retraced a Fibonacci 38.2% with an advance to around 60. The pattern looks like a rising wedge and resistance around 60 is confirmed by the Nov-01 and Jan-02 reaction highs (red arrows).
|In addition to the Fibonacci retracement, confirmed resistance at 60 and rising wedge, the stock has advanced almost 100% (32.46 to 62.83) without a significant correction or consolidation. Regardless of the trend, this overbought situation makes for an unpalatable risk/reward ratio for new longs.|
|Figure 2: Daily chart of Morgan Stanley.|
|Graphic provided by: MetaStock.|
|Turning to the daily chart, the stock appears to be tracing out a head and shoulders reversal. The left shoulder formed in January, the head in February/March and the right shoulder in March/April. The right shoulder is considerably smaller than the left shoulder as buying pressure was especially tepid in late March. The neckline resides at 56 and a CLOSE below this level would be most bearish.|
|A key indicator and volume point to distribution and help confirm the head-and-shoulders pattern. MWD broke below the Apr-03 trendline with gap on 22-Mar and a sharp decline in March. Volume expanded during this decline as selling pressure increased noticeably (red arrow/line). In addition, selling pressure was enough to forge a lower low in the Accumulation Distribution Line (blue arrow).|
|The stage is set for a support break, but it ain't broken until it's broken. For the fat lady to sing, the stock needs to close below neckline support at 56. Such a move would then project further weakness to around 49.|
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