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David Zalubowski / AP A Tacoma pickup truck on the lot of a Toyota dealership. |
The American Big Three—General Motors, Ford, Chrysler— have followed a steady trend downhill. GM and Ford's stock prices have deflated like a punctured tire. However it looks as if Congress will pump back some air into the Big Three through an emergency rescue package.
Toyota is a different story.
Unlike the U.S. automakers, which show a ski slope trend line, Toyota's [TM
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] ADR chart is dominated by a head and shoulder pattern. These are reliable chart patterns that set achievable downside targets. The weekly chart shows a well developed head and shoulder pattern. The distance between the neckline and the head of the pattern is measured. This value is projected down to set the downside target. Toyota achieved this $55.00 target.
So what next? The answer is provided by the behavior of other stocks and indices which are further advanced in this pattern development. In these market conditions, the head and shoulder pattern targets have been exceeded by around 18 percent. Apply this average to Toyota and it suggests a $45.00 downside target. This potential is further confirmed because the $55.00 level is not an established historical support level.
The common pattern of behavior following this extra dip below the head and shoulder pattern target level is the development of a fast rebound rally. This is then followed by a retracement and another rebound. This activity develops a symmetrical triangle pattern. This is a pattern of indecision. We have indicated on the chart where this pattern could potentially develop.
The symmetrical triangle pattern shows there is still strong selling pressure. This pressure is defined by the down trend line. As the price rises, existing stockholders sell into the market. This selling -- desperately chasing falling prices to capture a small profit -- sets the downtrend line.
The uptrend line is a buyers line. Buyers wait for prices to fall and when the bargain price is irresistible, they re-enter the market as buyers. The up sloping trend line shows some buyers are becoming more optimistic. They are not prepared to let the price fall as low as in the past before they come into the market as buyers. This is a mildly bullish result, so it seems strange to call this combined pattern a pattern of indecision.
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In the symmetrical triangle the buying forces and the selling forces are equally balanced. This makes the market vulnerable to an external shock.
This may be a further adverse move in exchange rates. It may include further global slowdowns and demand destruction. The market is waiting for news and the pattern provides a guide to how far the market will react.
The base of the triangle is measured. It is about $20.00. A breakout from the apex of the triangle gives an upside target near $75.00. This is below historical resistance, so the rise could carry towards resistance at $80.00.
A downside breakout has a target near $35.00. This target is achievable because there is very weak support near $55.00. A fall below the trend line encounters no strong support levels. This, and the ease of downward momentum, makes the achievement of target levels near $35.00 a higher probability. Traders will wait in this market until there is a clear indication of the direction of the breakout.
There are dangers in projecting pattern analysis onto stocks that have not yet developed the pattern. However the current activity of many indexes and stocks after they have reached head and shoulder pattern targets, suggests there is a high probability the Toyota chart will follow a similar pattern development.
In the meantime, congressional Democrats and the White House continued to negotiate a proposal to lend the struggling U.S, auto industry roughly $15 billion. The Democratic proposal would rush bridge loans to the struggling Big Three, but would also demand that the auto industry restructure itself in order to survive. Until something definitive is reached, it's still a downward ski slope for the Big Three.
If you would like Daryl to chart a specific stock, commodity or currency, please write to us at . We welcome all questions, comments and requests.
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