Lenovo is banking on the Beijing Olympics to promote its brand on the global stage. But China's largest PC-maker, the only local worldwide sponsor of the Games, has seen its shares fall nearly 40 percent since hitting a peak in November 2007. Will the computer maker's Olympic efforts help it score gold? Let's hit the charts to find out.
The recent consolidation pattern with Hong Kong-listed Lenovo is as thin as their new laptop computers and flat screens. This is classic range bound trading. In bear markets this is not necessarily a bad market feature. There are two bullish features on the Lenovo chart.
The first is the decline on downtrend pressure illustrated by the sideways pattern. The second is the long term uptrend shown with trend line A. This is most easily seen on a weekly chart. The trend line starts in March 2007 and captures the January and March 2008 retreats.
Traders watch for a successful test and retest of the trend line to signal a continuation of the uptrend. The tests and retests do not necessarily develop in the same ways as downwards dips seen in January and March. The test of the trend line also develops when a sideways trading pattern crosses the trend line. The daily chart is used to project the date of the crossing points.
The lower edge of the trading band hits the trend line in the first week for October 2008. The upper edge of the trading band hits the trend line in January 2009. This suggests continued and increasing upside pressure between October and January.
Unlike the Lenovo notebooks, this is not an elegant chart pattern. The trading band is around 11% wide. The width of the band is used to project an upside breakout target near 6.25. This offers a potential trade with a 22% return. The projected target is equal to the long term chart support level with Lenovo that developed in late 2007. A strong breakout above this level sets an upside target near 7.40. Adventurous traders can aim for a long term 45% return.
Sideways patterns in bear markets are treated with caution. The downside target projection near 4.60 is a minimum downside target. The nearest strong support level is below at 4.30. Any downside break has a high probability of falling quickly beyond the target level to genuine long term support. Chart pattern projection targets are more reliable when they are confirmed independently with other chart features such as historical support and resistance levels.
The sideways trading band is not a downtrend consolidation pattern. It occurs midway between the long term consolidation near 3.80 and the historical peak near 9.25. The trading band is part of a longer term trend retest and continuation pattern. Lenovo might not grab gold at these Olympics by they are well positioned for the next Olympics.
A fall below the long term trend line A is a bearish outcome. Initial support is near 4.30, but the strongest support is near the long term previous resistance level near 3.80.
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