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CHART ANALYSIS


Neckline Test For Morgan Stanley

04/12/04 11:45:19 AM
by Arthur Hill

After a nice advance since March 2003, Morgan Stanley (MWD) is approaching a key retracement and appears to be at a critical juncture.

Security:   MWD
Position:   Hold


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.



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.

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