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DESCENDING TRIANGLES


Vital Image Has Formed Descending Triangle

02/26/07 12:14:25 PM
by Chaitali Mohile

With this stock is entering a bearish trend, a major downturn is possible.

Security:   VTAL
Position:   Sell

In Figure 1, Vital Images, Inc. (VTAL), has formed a descending triangle after a major pullback rally of 16 points ($20-$36). This rally suggests that the stock was unable to break its previous high at $36. This shows the weakness in the rally. Here, the descending triangle is the reversal pattern of the previous uptrend. Traders should not jump into a short position on a breakout of the triangle. VTAL is likely to take support of its 50-day moving average (MA).

FIGURE 1: VTAL, WEEKLY. The stock has formed a descending triangle after a major pullback rally.
Graphic provided by: StockCharts.com.
 
Relative strength index (RSI)(14) has sloped downward from an overbought level, indicating a downside rally. If the RSI moves further below 50 levels, then a major correction is possible. Here, we can compare the RSI and 50-day MA, so traders should watch both levels before going for any short position. The average directional moving index (ADX)(14) is at 21, indicating a developing bearish trend with -DI (negative directional index) turning up and +DI (positive directional index) sloping down. This shows the possibility of -DI will cross over +DI upward, strengthening the seller's pressure. This crossover will give a sell signal. Below the $30 support level, traders can see the $20 -- that is, the previous low, and hence, $20 will be the target for a short trade after 50-day MA support turns resistance.

The stock has consolidated sideways after a dip from $36 to $32. The consolidation range is $34-$32. Figure 2 shows that the price has moved below the lower range, and the lower trendline has gone to the resistance line now. This shows the stock is ready to continue to fall. The ADX (14) at 21 indicates beginning of bearish trend. -DI has moved steeply upward, indicating increasing short side pressure, whereas declining +DI shows reducing buyers from the stock. The RSI (14) is showing some bounce from 40 levels. Traders should note that a buying opportunity is created only above the 50 level of the RSI, so the 43 level is a no-man's land for a long-term trader. However, looking at the increasing seller's pressure, the RSI is likely to move down further, and hence, traders can go short below the 40 level on the RSI.



FIGURE 2: VTAL, DAILY. The price has moved below the lower range, and the lower trendline has turned to the resistance line.
Graphic provided by: StockCharts.com.
 
Hence, VTAL should be on top of the watchlist for short-term traders. The stock is ready to break out of a descending triangle, so watch out for the support levels mentioned.





Chaitali Mohile

Active trader in the Indian stock markets since 2003 and a full-time writer. Trading is largely based upon technical analysis.

Company: Independent
Address: C1/3 Parth Indraprasth Towers. Vastrapur
Ahmedabad, Guj 380015
E-mail address: chaitalimohile@yahoo.co.in

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Date: 02/27/07Rank: 4Comment: 
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