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STOCHASTIC OSCILL


QLogic Firms At Support

10/07/08 09:47:14 AM
by Arthur Hill

QLogic Corp. formed a bullish engulfing pattern at support, and an upturn in the stochastic oscillator would argue for a retracement of the prior decline.

Security:   QLGC
Position:   Accumulate

Figure 1 shows QLogic (QLGC) declining to support over the last two months. The decline was just as sharp as the prior advance, and the stock returned to its early July low. A gap up and high-volume surge established this support level in early July. Since returning to support, QLGC formed a bullish engulfing with good volume. The ability to recover after a weak open shows buying pressure and good volume reinforces the pattern. Follow-through is, however, required to confirm the pattern.

FIGURE 1: QLGC, DAILY. This stock's decline was just as sharp as the prior advance and the stock returned to its early July low.
Graphic provided by: TeleChart2007.
 
For follow-through signs, I am turning to the stochastic oscillator, which became oversold over the last few days. This is the fourth oversold reading in the last four months. The first move from oversold levels did not provide a good signal. The second move proved an excellent signal. The third did not provide a good signal. Here we are at the fourth with a bullish engulfing pattern. A move above 20 would confirm the bullish engulfing pattern and argue for a bounce. Failure to bounce and a move back below 14 would negate the setup.

FIGURE 2: QLGC, DAILY. The blue dotted lines are set at the 50–62% retracements.
Graphic provided by: TeleChart2007.
 
I am turning to key retracements and broken support for upside targets (Figure 2). The blue dotted lines are set at the 50–62% retracements. Oversold bounces often retraced 59–62% of the prior advance, and this is the first area to expect resistance. Second, broken support around 18 turns into resistance. This is a basic tenet of technical analysis. The extent of the bounce depends on liftoff and volume. A strong move, like the July gap, with good volume would call for a bigger bounce. A weak move off support with low volume would call for a smaller bounce.



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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Date: 10/12/08Rank: 3Comment: 
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