|Looking at the weekly chart for some perspective, the stock went on a major bull run from Mar-03 to Mar-04. It stalled just below 115 as two peaks formed in March and April. Combined with the intermittent low in March, a double top evolved with key support at 105.64.|
|Figure 1: Weekly chart of MDY.|
|Graphic provided by: MetaStock.|
|The decline in April and May broke below the trendline extending up from Mar-03 and below the Mar-04 low to confirm the double top. Based on traditional technical analysis, the projected decline would be to around 98 (113.48 - 105.64 = 7.84, 105.64 - 7.84 = 97.8). Also notice that volume expanded on the support break as selling pressure intensified (gray arrows).|
Figure 2: Daily chart of MDY.
Broken support at 105.64 has now turned into resistance as the stock consolidates (gray oval). This is the first level to watch for signs of strength and a break above this level would open the door to a retracement of the prior decline (103.38 to 101.87).
|Even though the consolidation is not a picture perfect pennant or flag, it should be considered a bearish continuation pattern. The index declined sharply from around 113 to around 102 and then paused for a rest. The prior move was down and a continuation should be expected. A move below the consolidation low at 101.87 would signal a continuation down and the next target would be the double bottom projection around 98.|
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