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Eastman Kodak's Rising Wedge

12/12/01 08:41:22 AM
by David Penn

Shares of Eastman Kodak fell from a September flag to year-to-date lows. Now, a rising wedge threatens to send them back.

Security:   EK
Position:   N/A

Often, right smack in the middle of a bull market, are stocks that are not playing along. Whether these stocks are simply lagging for fundamental or technical reasons, or their relative underperformance is a sign that something wicked lies beneath that meandering stock price, is often a mystery until the stock either rallies and joins like stocks in the advance, or until the stock proves its detractors correct and resumes its descent.

Another way to find out whether a stock is truly rotten--as opposed to just temporarily being lost in its own private bear market--is to look for multiple bearish chart patterns. A breakout from a head and shoulders bottom, for example, that rushes up into an ascending triangle is generally indicative of a stock that has a great deal of upside momentum behind it--insofar as it has broken through two areas of consolidation or resistance already (the neckline from the head and shoulders bottom and the downwardly sloping trendline from the ascending triangle). Similarly, when a stock trends downward, then finds itself in a bearish continuation from which it breaks on the downside, only to enter still yet another bearish continuation pattern ... the opportunities on the short side can be significant.

A rising wedge quick on the heels of a bearish flag suggests that the bear isn't done with Eastman Kodak.
Graphic provided by: MetaStock.
 
Eastman Kodak (EK) is an example of a series of bearish chart patterns perhaps pointing to further weakness. EK entered the fall of 2001 in a trading range between 45 and 50. The terrorist attacks of September 11th set back shares of EK initially--as most shares were set back. And EK did promptly rally from the post-attack lows of about 30. Unfortunately, the EK rally took the form of a flag and, given the prevailing trend, a bearish flag at that. EK rallied to a high of 35.5 in late September, but as prices began to retreat to the lower end of the flag "channel'" the bottom broke. Shares of EK dropped 26% in six days. Another rally attempt began in the wake of the October 31st sell-off. Early in November, shares of EK began to climb, gaining more than 20% to close at 30 by the end of the month. The advance continued into December, with EK reaching a rally high of 31.8, which registered the stock's first 30-day high since August.

As promising as the new 30-day high is for Eastman Kodak, those looking to get long the stock may want to continue looking. The EK rally has been largely contained within a pair of upwardly sloping, converging trendlines--a pattern that closely resembles the bearish rising wedge chart formation. The rising wedge generally suggests a market advance that is running out of true believers as the stock climbs. The tightening of the wedge as it moves up suggests the coiling of a spring from which a major move upward or downward is increasingly likely. The size of the rising wedge, just over a month, is appropriate and the downwardly trending volume is also a common characteristic. The downwardly trending volume, in and of itself, is a bearish sign hinting that there are fewer and fewer buyers available to bid prices upward.

Where might a bearish breakdown from this rising wedge end up? Trading the breakouts from rising wedges can be tricky, considering the formations commonly experience stop-buy inducing pullbacks. However, the measurement rule for rising wedges is fairly straightforward, with prices expected to reach the bottom of the formation at a minimum. In this case, a downside of about 25 would be expected should the wedge break out on the downside. As for the breakout/pullback issues, a stop-buy near the top of the formation or a strike price in that area may be a safer move--from the point of a winning trade that isn't quickly stopped out--than jumping in at the exact same place where the breakout occurs.



David Penn

Technical Writer for Technical Analysis of STOCKS & COMMODITIES magazine, Working-Money.com, and Traders.com Advantage.

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