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VOLUME


IBM Breaks Wedge Support

11/06/07 09:00:25 AM
by Arthur Hill

IBM failed to take out resistance, and the high-volume decline looks like the start of an extended down move.

Security:   IBM
Position:   Sell

I wrote about IBM on October 10 as it consolidated near resistance at 119-120. The stock formed a cup-with-handle pattern, and a break above 120 would have been bullish. The stock even broke above 120 intraday but failed to hold above this key level and closed back below by the end of the day. This highlights the importance of using closing prices to validate breakouts. Traders can also use time filters and require a security to hold its breakout for three days.

FIGURE 1: IBM, DAILY. IBM failed to hold its resistance breakout and also broke support at 114 with a high-volume decline.
Graphic provided by: TeleChart 2007.
 
Not only did IBM fail to hold its resistance breakout, but it also broke support at 114 with a high-volume decline. The lows from the September consolidation and the 50-day moving average marked support in this area. High volume validates the breakdown and the stock firmed around 114 in the second half of October. See Figure 1.

FIGURE 2: IBM, DAILY. The stock declined from 120 to 111 in four days and became short-term oversold.
Graphic provided by: TeleChart 2007.
 
Figure 2 focuses on this firmness. The stock declined from 120 to 111 in four days and became short-term oversold. This firming alleviated the oversold condition and the stock formed a rising wedge. There was an attempt to break back above the 50-day at the end of October, but this breakout attempt failed and the stock broke wedge support over the last two days. This break is bearish and it signals a continuation of the prior decline. The downside first target is around 107 (200-day) and the second downside target is around 102 (June low).



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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