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MACD


Merrill Lays Low

10/18/07 08:52:27 AM
by Arthur Hill

Merrill Lynch continues to underperform the broader market, and this points to a continuation of the July–August decline.

Security:   MER
Position:   Sell

Figure 1 shows Merrill Lynch (MER) and the price relative. The stock and the price relative peaked in May and declined until August. MER firmed over the last two months, but the price relative continued to drift lower and recorded a new low at the end of September. This occurred because the Standard & Poor's 500 shot to new highs in September and MER did not follow the market higher. Instead, MER laid low and underperformed.

FIGURE 1: MER AND THE PRICE RELATIVE. The stock declined sharply from June to August and then formed a triangle consolidation over the following two and a half months.
Graphic provided by: MetaStock.
 
On the price chart, the stock declined sharply from June to August and then formed a triangle consolidation over the last two and a half months. This represents a rest after the decline and I am watching the triangle boundaries for the next signal. A break above 78 would be bullish and a break below 70 would be bearish. Given continued relative weakness, the odds favor a break below 70 and a continuation of the prior decline.

FIGURE 2: MER AND THE MACD. The MACD moved below -3 in August and this represented a bearish extreme.
Graphic provided by: MetaStock.
 
Figure 2 shows MER with the moving average convergence/divergence (MACD). The indicator moved below -3 in August and this represented a bearish extreme. As the stock consolidated and traded flat within the triangle, the MACD worked its way back to the zero line. This makes sense because momentum was essentially flat for two months and zero represents flat momentum. The moment of truth is now approaching as the MACD edged into positive territory this month. Even though the bulls have a slight momentum edge now, I am watching for a move below -1 to turn bearish on momentum. This could be used to confirm a triangle break in the stock.



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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