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RETRACEMENT


Schwab Reverses After Classic Retracement

03/03/05 03:13:22 PM
by Arthur Hill

After a 50-62% retracement of the prior advance, Schwab found support around 10.5, and buying pressure is on the increase.

Security:   SCH
Position:   Accumulate

Schwab was one of the market leaders in late 2004, but has fallen vulnerable to market weakness in 2005 nonetheless. This decline has reached a classic retracement area that could lead to a reversal. Advances are often followed by corrections, and these corrections retrace from 38% to 62% of the prior move. In addition to these Fibonacci numbers (0.382 and 0.618), a 50% retracement is also normal and is used by many Dow theorists. When a potential correction approaches these retracements, traders should take note and be on guard for support, a bullish reversal, or both.

For Schwab, the January-February decline retraced 50-62% of the prior advance. Based on the previous paragraph, it is time to take notice and look for signs of support or strength. Looking at price action over the last four weeks, these are not hard to find. First, the stock gapped down on high volume and then immediately firmed around 10.5. Second, this firmness gave way to a long white candlestick on high volume and the gap was filled (green arrows). After a pullback to 10.5 again, the stock formed a bullish engulfing (green oval) and broke above the trendline extending down from late December. These are signs of both support and buying pressure.

Figure 1: Schwab. Schwab was one of the market leaders in late 2004, but has fallen vulnerable to market weakness in 2005.
Graphic provided by: MetaStock.
Graphic provided by: Reuters Data.
 
Resistance at 11.1 is the last hurdle to a trend change. An uptrend requires a higher high and higher low. The bullish engulfing marks a reaction low that is just above the early February reaction low. A move above the mid-February reaction high would confirm recent buying pressure and turn the trend bullish. As a continuation of the prior advance, a move above the December high would be expected. A move below the bullish engulfing low would negate this bullish prognosis.



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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