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FLAGS AND PENNANTS


Humana Breaks Flag Resistance

09/12/08 08:51:36 AM
by Arthur Hill

Humana broke flag resistance with good volume, and the next resistance level marks the neckline of a larger head & shoulders reversal pattern.

Security:   HUM
Position:   Accumulate

Figure 1 shows daily prices with volume. Humana (HUM) surged from early July to early August and then pulled back from early August to early September. The pullback retraced about half of the prior advance and formed a falling flag. Falling flags denote corrections after an advance, while rising flags denote corrective advances after a decline. After firming the first week of September, the stock surged through flag resistance to signal a continuation of the July–August advance.

FIGURE 1: HUM, DAILY. Humana surged from early July to early August and then pulled back to early September.
Graphic provided by: TeleChart2007.
 
The bottom indicator shows the stochastic oscillator (20,5,5). Note how the indicator moved from overbought levels (>80) to oversold levels (<20) as the flag formed. Oversold conditions served as an alert that the correction may be coming to an end. The indicator turned up over the last few days and moved above its signal line. Momentum is turning up, and this affirms the flag breakout.

Figure 2, the weekly chart, shows a potential head & shoulders pattern forming over the last several months. HUM fell sharply in the first quarter and then consolidated. The surge off the summer low occurred with good volume. After a pullback in August, the stock surged again this week with good volume. Volume is important for confirming the head & shoulders. Expanding upside volume shows stronger buying pressure, and this increases the chances of a breakout.

FIGURE 2: HUM, WEEKLY. A potential head & shoulders pattern forms over several months.
Graphic provided by: TeleChart2007.
 
Neckline resistance resides around 50. A break above this level would confirm the pattern and project further strength toward 65. The length of the pattern (neckline to head) is added to the neckline breakout for an upside target. The low of the right shoulder marks key support now, and a break below this level would negate the pattern.



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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E-mail address: arthurh@tdtrader.com

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