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DOUBLE BOTTOMS


American Express Charges Higher

05/04/05 08:34:31 AM
by Gary Grosschadl

A double bottom is a classic bottom formation, and this is apparent with AXP.

Security:   AXP
Position:   Buy

For a valid double bottom, the troughline must be broken to the upside, and this occurred two trading sessions ago. What makes this more significant is the fact that the ever-important 200-day moving average was also cracked at the same time, in essence acting as a natural troughline.

This provides a measured move to the first target at ~55.20 (being the distance of the bottom to the troughline, applied above the troughline). This coincides with a previous shooting star candlestick. With extra juice, this move could also reach 56.80 being close to the previous high.

Technical traders should observe that two positive divergences aptly foretold that a double-bottom attempt was in the making. The moving average convergence/divergence (MACD) and the relative strength index (RSI) both show a higher high, while the stock price actually tested lower (Figure 1).

Figure 1: AXP. American Express puts in a double-bottom formation on this daily chart.
Graphic provided by: StockCharts.com.
 
Two other indicators are also showing bullish promise. The directional movement indicator at the top of the chart shows a bullish setup, with the directional indicators +DI above -DI while ADX is above 20. The ideal configuration would be an ADX upslope above 25, and this may soon transpire. Also noteworthy is the Chaikin money flow indicator showing a move to bullish territory. This indicator of supply and demand shows buying pressure building. The stochastics, however, shows some healthy concern with a move to overbought territory above the 80 level. Although this indicator can sometimes stay above this level for extended periods, a turn below 80 can signal a pause or coming downturn.

Should the stock decide to consolidate these recent gains, traders should look to a support test of the 200-day exponential moving average (EMA). A close under the 200-day EMA could be a sign of a false breakout. Note the breakout volume is a litle thin, so this could be a possibility. Watch the stock's reaction to the 200-day EMA as a guide going ahead. Strength above this level can lead to those higher targets, former congestion at $54 being a lesser target.



Gary Grosschadl

Independent Canadian equities trader and technical analyst based in Peterborough
Ontario, Canada.

Website: www.whatsonsale.ca/financial.html
E-mail address: gwg7@sympatico.ca

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Date: 05/04/05Rank: 5Comment: 
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