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FLAGS AND PENNANTS


Bed Bath & Breakdown

06/09/08 09:55:52 AM
by Arthur Hill

After failing at long-term resistance, Bed Bath & Beyond broke pennant support to signal a continuation of the May decline.

Security:   BBBY
Position:   Sell

Figure 1 shows weekly prices for a long-term picture. Bed Bath & Beyond (BBBY) declined sharply in 2007 and then recovered with a rally in 2008. The advance retraced 50–62% of the prior decline and met resistance near the consolidation zone (blue oval). Both the retracement and the pattern are typical for corrective rallies. The 2007 decline sets the long-term tone and the 2008 advance is countertrend.

FIGURE 1: BBBY, WEEKLY. Here are the weekly prices for a long-term picture. Bed Bath & Beyond declined sharply in 2007 and then recovered with a rally in 2008.
Graphic provided by: TeleChart2007.
 
After hitting resistance and becoming overbought in mid-May, the stock declined sharply over the last three weeks (three candlesticks). BBBY finished right at the lower trendline of the rising wedge. Further weakness with a trendline break would be bearish and signal a continuation of the 2007 decline. The stochastic oscillator became oversold with a move above 80 but turned lower over the last few weeks, and upside momentum is deteriorating.

Figure 2, the daily chart, sports a pennant and support break with high volume. BBBY declined sharply in mid-May and then consolidated with a pennant. The sharp decline created an oversold condition and this pennant worked off this condition. After trading flat for 10 days, the stock broke pennant support with a long black candlestick on high volume. This shows a marked increase in selling pressure and signals a continuation of the May decline.

FIGURE 2: BBBY, DAILY. Here's a pennant and support break with high volume. BBBY declined sharply in mid-May and then consolidated with a pennant.
Graphic provided by: TeleChart2007.
 
The March low around 27 marks the first target for this breakdown. The pennant break becomes resistance and the first level to watch for signs of resilience. The pennant highs become key resistance and it would take a move above these levels to turn bullish again.



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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