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Yola Edwards

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A tale of two blue chips

Yola Edwards

TORONTO (GlobeinvestorGOLD)—After declining steadily for the past few years, General Electric Co.'s share price appears to have found bottom and may be climbing back. The stock posted a double bottom from mid-October 2002 to mid-February 2003, when it reached lows of $21.40 and $21.30 respectively.

In April, the stock finally jumped over the declining 200-day moving average (ma), with a breakaway gap from $25.50 to $26.72, which hasn't yet been filled. A breakaway gap signals the completion of a basing pattern. Although prices may return to the breakaway gap (for example, in the case of a bullish breakout) and may even close some of the gap, there is usually some portion left unfilled. Adding to the basing scenario is the fact that the stock has retreated back down toward the 200-day ma and the breakaway gap even as it continues successfully to trade above both.

GE's share price has recently traded down toward the lower oversold Bollinger band, indicating a bounce could be in store. Bollinger bands measure volatility and relative price levels over a specified period of time; they indicate overbought and oversold levels relative to a moving average.

As the stock rallies from its oversold condition, it will likely encounter some resistance from the 50-day ma at about $29, but once through that level, the double bottom's technical measurement indicates a target price of about $33.GENERAL ELECTRIC COMPANY


International Business Machines Corp.'s share price seems to be trapped in a trading range or consolidation pattern between $75 and $90. The shares formed a broad-based top over a three-year period and finally broke down with a breakaway gap on May 4, 2002, when the stock dropped from $97.25, opening at $88.59 the next day.

The stock continued its decline, and the end of the downtrend was marked by an exhaustion gap in September 2002, which is a final gap appearing near the end of a market move. But the stock's decline was quickly reversed in a sharp "V" or spike reversal. A "V" reversal is preceded by a steep trend, and then the change is characterized by a sharp immediate turn in the opposite direction.

IBM stock has been locked in a sideways trading range for the past nine months. At current levels, it is supported by the lower oversold Bollinger band and the 50-week ma. Since it is oversold, the stock is due for a bounce, but its heavy overhead resistance—the ceiling created by the breakaway gap at $88.59—will hinder the upside rally past that point.

It is difficult to say how long the shares will stay in the trading range, however. Once the stock is able to close above $90, it could try to close the breakaway gap. Again, however, further advancement from there will be hindered at about $98 where the stock encounters the 200-week ma.
INTERNATIONAL BUSINESS MACHINES

Yola Edwards is a contributing writer and technical analyst for Bell Globemedia Interactive, providing options and technical analysis research on a variety of North American equities.

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