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Toyota's Stock is Stuck in First Gear: Charts

Monday, 1 Feb 2010 | 11:13 PM ET

Toyota's stock is stalled at the traffic lights and has been for many months.

It's convenient to attribute the sluggish performance to the automaker's recent recall woes, but a closer look at the stock's technicals will show the downtrend's been in place for sometime now, although the stock did manage to break out from the descent somewhat last year to take on a prolonged sideways trading pattern.

Traders should take note of the width of the trading bands, as they can give helpful hints on both upside and downside targets. The current slide in the Toyota price has initial support level near 3,300. A fall below this level finds longer term historical support near 2,700.

The upside for investors of the stock, is that there is a higher probability the price will rebound from the 3,300 level, as this has been well-tested in 2009. The downside however, is that Toyota would find it difficult to breakout beyond the very strong 4,200 resistance level, which it has attempted several times to do so last year.

If this breakout is successful then the upside target is near 5,000. This is a reasonable trading return but investors need to be wary of this type of breakout. Although there has been a prolonged and steady downtrend, the breakout from the downtrend has not resulted in a strong uptrend. This is NOT a V-shaped recovery. It is not a strong uptrend, and in fact, reduces the upside for Toyota's stock.

The most appropriate tactics to use in this trading environment are short-term momentum trades. The move between 3,000 and 4,200 gives 27% return. These are reasonable trades, but they are not investments.

There is a low probability Toyota will fall below long term support near 2,700, so any test of this support area offers a buying opportunity for a rebound to 3,300, which wil yield a decent 22% gain.

It will take more than the release of favorable earnings and the resolution of the faulty gas pedal to shift Toyota out of first gear. It will be some time before Toyota can find second gear and develop trend acceleration.

If you would like Daryl to chart a specific stock, commodity or currency, please write to us at ChartingAsia@cnbc.com. We welcome all questions, comments and requests.

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