Charts Tap Dell for Return over HP: Guppy
Earnings reports give a good idea of what the past looked like, and perhaps guidance to how the future may develop. For investors and traders the important question is related to the degree of room for future growth.
The question they ask is: what is the upside? When we compare the charts of Dell and Hewlett-Packard there are two very different answers.
The HP price stalled at $53. Now that is a pretty good result if you had enough courage to get in near $27. It gives you just on 96 percent return.
But here’s the rub: the retreat from $53 in recent weeks is a retreat from a well-established resistance level. HP has been unable to break out above this resistance level and recent weeks have seen a sharp pullback and retest of the support area near $48.
The price broke through this level before developing a rally. Failure to move above $49 and develop a sustained rebound is bearish. The next historical support level is down near $41. HP has significant upside barriers from a technical perspective and this inhibits capital growth for investors.
Dell shows a very different pattern of development. Investors who got in near $8 had the opportunity to make about 100 percent return as Dell hovered around $16. The return on this leg of the rising trend is about the same as HP. But unlike HP, the Dell chart does not show any long-term double-top patterns. The retreat from $16 is not based on a long-term historical resistance level.
Those who follow Dell closely from a fundamental perspective may point to specific company factors or perhaps to general market conditions to explain the retreat from $16. There is no chart-based or technical reason for resistance to develop in this area and this is very good news for Dell.
The nearest support level is near $13. Dell has successfully tested this several times. The support level has held. The GMMA shows the development of a sideways pattern of behavior.
Better Risk/Reward for Dell
Remember the HP chart shows powerful moves below the support level. The Guppy Multiple Moving Averages (GMMA) display shows a strong test of the long term GMMA. This is a test of investor confidence. The Dell chart shows a pause in the trend rather than a change in the trend. That’s a bullish feature.
The Dell chart does not show any strong constraint on the upside. A rebound from $13 will encounter a recently formed resistance level near $16 but the historical resistance level is near $19 and beyond that, near $23.
A support rebound from $13 gives a potential 46 percent or 77 percent return. The support rebound on the HP chart from $48 to $53 gives a 10% return as it runs into strong historical resistance.
From a charting perspective the Dell chart has more room to move and it is showing stronger support. The potential upside for Dell is larger than HP because the historical resistance level is much further away. The Dell uptrend is drifting sideways rather than clawing its way back up to failed support levels.
Dell also offers a better level of risk/reward. If support near $13 fails then the next support level is near $11. A fall from $13 to $11 is a 15 percent loss. A fall in HP from $48.50 to $41 is also a 15 percent. When looking to the future the Dell chart shows about the same level of risk and greater potential reward. If Dell disappoints in earnings it will test the first level of support near $13. If HP disappoints, it will test the second level of support near $41 because it has already tested the first level of support near $48.50.
Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders –www.guppytraders.com.. He is a regular guest on CNBCAsia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.
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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