The DELL Decline

Sep 3, 2008: 12:23 PM CST

Dell Inc (DELL) missed earnings last week and investors punished the stock by sending shares lower, breaking the daily uptrend and numerous levels of support.  Let’s take a quick look at the charts to see what we can learn from these developments.

Dell Daily:

Prior to the earnings announcement plunge, price had completed a “Three Push” pattern which often occurs prior to a reversal (albeit we can never anticipate the strength of price reversals), and the ‘Three Push’ pattern was complete with a triple swing negative momentum divergence – clearly the risk of ‘long DELL’ was high.

What was shocking was how quickly and violently price broke all recent levels of support (Fibonacci retracements, moving average support from all 3 averages, and the prior July swing low).  This is an unusual pattern, and underscores why earnings plays can be very risky indeed.

At the moment, price appears to be in a daily time frame free-fall, and the new momentum low is significant.  Following a retracement, odds are for lower prices yet to come in this stock.  For possible support, let’s raise the time frame to the weekly chart.

Dell Weekly:

It appears the $18 per share level could be the next eventual target in terms of price support and reversal.  This comes in at the 2008 lows in April, but should price fail there, all bets to the long-side would be off.

I also wanted to use this example to show multiple momentum divergences on the weekly chart, which precedes price reversals and provides structural opportunities for trade management.  Remember, momentum (supply/demand imbalance) precedes price.

2007 showed a negative momentum divergence which preceded the trend/price reversal down.  Mid-2008 showed a ’rounded reversal’ complete with a positive momentum divergence, which leads us to the current negative divergence and sharp price decline.

As an added bonus, price formed two ‘doji’ candles prior to the plunge – in addition to the dojis, we had price at the 61.8% Fibonacci retracement from the 2007 highs to the 2008 lows price swing.  We had significant confluence of technial (chart) factors, in terms of a negative divergence, doji (indecision/reversal candles), and resistance via Fibonacci retracement.  Combined with the “Three Push” pattern and negative divergence on the daily chart, the odds were quite high for a price reversal.

DELL shows how to use multiple time frames and different forms of technical analysis to tilt the odds in your favor in terms of your price structure analysis.

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