StockWatch (Aug 19-22, 2008): PSEi, MEG, EDC

PSEi (Chart: Daily Resistance: 2780 Support: 2620/2600)

The index managed to gap up on the first day of trading last week, but only to be stopped by the resistance at that level. There are 2 resistances hindering the index at that level: the support line turned resistance from 2003 and the 130 day MA. The gap up on Monday was equaled in volume when the sell down happened the next day. And the following days also had large volume on the sell down days, which is a not so good indication. Plotting the troughs and peaks, we can see that there seemed to have formed a rising wedge. The characteristics of a rising wedge seem to fit the current market situation where rising wedges can be seen on a downward trending condition, which is what we recently had. And to add, the index may have already broken a short term support line, when it moved sideways last week. If this is indeed a valid rising wedge formation, then downward target price is around 2600, which is a point support line connecting the troughs in July and also the 38.2% Fib retracement level. I hope that this is an invalid rising wedge, otherwise, this might be an indication of worst things to come (rising wedges are considered bearish indications). Aside from the rising wedge formation, there may also be a possible island reversal. But this is still not confirmed as the island hasn’t been formed yet. To complete the island reversal picture, a gap down is needed. So for next week, still watch out for a possible continuation of the sell down as volume was noticeably large on the down days last week and the RSI is still very much oversold. Watch out also for a possible inverse head and shoulder formation if the support at 2600 holds.

MEG (Chart: Daily Resistance: 1.72 Support: 1.30/1.20)

MEG is not in a good position currently with a large volume and large spread on the sell down last Friday. A rising wedge can also be seen in the chart which was broken last week. The target price of the rising wedge was also reached. This is a stock to avoid for now given the large spread and volume on the sell down. Next support is at 1.30 which is the previous resistance on the small ascending triangle, while 1.20 is a point in the support line connecting the troughs in July.

EDC (Chart: Daily Resistance: 4.75 Support: 4.40)

EDC is showing some signs of positive divergence with the price going lower and RSI and MACD creating higher lows. Aside from the positive divergence, the stock seems to be forming a falling wedege, which is a bullish indicator. A peculiar thing about this falling wedge is that it can be found in a downward trending action. A falling wedge in a downward trending stock is a bullish indication and may probably indicate a possible reversal. What we are waiting for now is a break in the resistance line. Possible breakout point is at 4.70. If broken with volume target price is around 5.70. Now an important ingredient for the breakout is volume. Since this stock is trending downwards, in order to pull out of its dive, we need a very large volume to consider that we will be having a prosperous breakout. Current price level at 4.55 is already a good entry level, just watch out for support at 4.40 and sell if support is broken.