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CANDLESTICK CHARTING


Bullish Candlestick Reversal Fails To Inspire Pulte

10/28/05 08:20:20 AM
by Arthur Hill

Pulte Homes forged a classic retracement but cannot follow through on a bullish candlestick reversal, and lower prices are likely.

Security:   PHM
Position:   Sell

First, let's look at the retracement (Figure 1). The stock, Pulte Homes (PHM), advanced from the mid-20s to the upper 40s and was clearly one of the top performers at the time. The current decline to around 35 retraced 50-62% of that advance. A typical retracement extends 38-62%, and this retracement is in the upper half of that range. In addition, the stock found support from February resistance and March-April support.

FIGURE 1: PHM. The stock advanced from the mid-20s to the upper 40s in a year, with a retracement of 50-62%.
Graphic provided by: MetaStock.
Graphic provided by: MS QuoteCenter.
 
Even though the current retracement is typical for a correction, a bullish catalyst is required to end the correction and start moving higher. Enter the bullish engulfing on October 19 (Figure 2, green oval). This candlestick affirmed support at 35 with a high-volume advance and a long white candlestick.

FIGURE 2: BULLISH ENGULFING PATTERN. A bullish catalyst is required to end the correction and start a move higher -- enter the bullish engulfing pattern on October (green oval) but declined on expanding volume in October (red oval).
Graphic provided by: MetaStock.
Graphic provided by: MS QuoteCenter.
 
Followthrough is the only thing missing, and the stock is having trouble building on this reversal. The bullish engulfing represents one day of buying pressure, and some followthrough is required to prove it isn't a fluke. The stock consolidated the last four days, and all it would take is a nice high-volume move above this consolidation high (38.2). Is that asking too much?

Volume is drying up and confirmation looks unlikely. The stock declined on expanding volume in October (Figure 2, red oval). The bullish engulfing countered with a big move on big volume, but that was all the bulls could muster. The next two days saw selling pressure on above-average volume and then two days of buying pressure on below-average volume. Breakouts are unlikely when downside volume is outpacing upside volume and a break below the bullish engulfing low would open the door to further weakness.



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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Date: 10/29/05Rank: 4Comment: 
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