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HEAD & SHOULDERS


Novell Breaks Neckline Resistance On Good Volume

05/25/05 07:52:31 AM
by Arthur Hill

Novell diverged from NASDAQ in March, and a recent breakout on good volume points to higher prices in 2005.

Security:   NOVL
Position:   Buy

NASDAQ declined from January to April and recorded new lows for 2005 in the second half of April. In contrast, NOVL bottomed at the end of February and moved higher in March. While NASDAQ moved to new lows in April, NOVL held firm and consolidated. Novell's performance since the end of February shows strength in the face of broad weakness in NASDAQ. This kind of outperformance is bullish.

The stock forged two significant breakouts over the last few months. First, NOVL broke above the upper trendline of a falling price channel that extends from November to March. Second, the stock broke above neckline resistance of an inverse head-and-shoulders pattern. The stock consolidated after the first breakout (gray oval) with resistance just above 6. This formed the right shoulder, and the breakout is clear. See Figure 1.

Figure 1: NOVL. Novell bottomed at the end of February and moved higher in March. The stock's performance since the end of February shows strength in the face of broad weakness in NASDAQ.
Graphic provided by: MetaStock.
Graphic provided by: Reuters Data.
 
Volume confirms the breakout, and higher prices are expected. The stock surged above neckline resistance with two days of good volume (green arrow). In addition, the move was strong as the stock gained more than 10% in two days. The Chaikin money flow turned positive in late March and remains in positive territory. This shows consistent buying pressure, and the November high around 7.75 is the first target.

Even though volume and momentum confirm the strength of this breakout, not all breakouts work. For signs of failure, I would turn to the trendline extending up from late February and the mid-May low (5.86). A move below these levels would signal a breakout failure.



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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Date: 05/25/05Rank: 5Comment: 
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