Lehman Brothers Holdings (LEH), a major financial company, recently ejected through a couple of technical analysis patterns worth noting that serves as an educational lesson on moving averages, patterns, support, and resistance. It would appear more downside is likely based on the recent break.
I must first state that technical analysis is more of an art than an exact science, but the principles can be effective in position entry, management, risk control, and price projection.
First, notice the rising trendline on the weekly chart from June 2006 until the break in July 2007. A triangle consolidation pattern formed at this time, which served as a key reversal pattern as buyers could not find the strength to drive prices higher.
Also, a momentum divergence formed from October 2006 until February 2007, when it was resolved quite violently to the downside (notice the swing highs were not confirmed by new highs in the oscillator).
Also, the February price swing set up new momentum lows, and based on the principle “Momentum Precedes Price,” we could have expected new price lows were yet to come following some sort of price retracement. The retracement came in the form of a triangle reversal pattern.
Upon the break of consolidation, following a simultaneous break of the 20 and 50 period moving averages (which can be expected to hold as reasonable support in an uptrend), the case began for a retest of the rising 200 period moving average, and a significant short-sell trade could have been initiated. At the minimum, traders should have exited any longer term holdings (long positions) in the stock at this break. The odds had shifted towards impending price weakness over further anticipation of gains.
A retest of the 200 period average came quite swiftly, and the retracements took price to key resistance now from the 20 and 50 period moving averages, which had re-oriented themselves into a downtrend style mode, where the 20 was beneath the 50. The trend was now confirmed as down, and price found resistance at the averages.
Notice how the 50 period average served has resistance (labeled) and the 200 period has served as support. That changed this week, with price plummeting and closing beneath the 200 period key average.
What may be setting up is some sort of perverse bear flag, which could take price $20 lower due to the inherent price projection of the “measured move” leg of the bear flag. Price could potentially reach $45 or lower as a result of the bear flag.
On the monthly chart, we see a triangle break in 2003 which led to a large ejection move to the upside.
A potential head and shoulders pattern may have formed, following one of the most pronounced momentum divergences possible (compare swing highs in price to oscillator highs).
Using technical analysis, one realizes that the odds had shifted for downside risk, and traders should not have been surprised by the swift downward price action.
Monthly support via the 20 and 50 period moving averages has been shattered, and price is now in a confirmed monthly downtrend, with odds favoring further deterioration in price.
Study the chart of LEH, as there are a lot of smaller lessons you could learn â€“ also apply your own style of analytics to the price charts to see what conclusions you perceive.