Sunday, January 22, 2012

BMC Software (BMC) nudges against price channel resistance

Friday’s trade saw BMC Software, a component of the NASDAQ-100 index, arrive at important price channel resistance on the hourly chart.

As usual, let’s begin the investigation with the big picture: the daily chart, covering 4 years of price action (4 y d). With a moment’s work, one can fit a price channel that relatively cleanly encapsulates price behaviour from September 2008 through September 2011, including all the local peaks of the rally; it’s shown below in dashed red lines. While the channel could be a better fit – for instance, by touching the local minimum of September 2010 – it nonetheless does suggest that BMC price action can be modeled by price channels to a relatively successful degree.

Moving on to the hourly chart (180 d 1h), BMC again reveals itself as behaving in accordance with the boundaries of a price channel; virtually all price action from July 28, 2011 to the present fits within a single set of parallel trendlines.

Moreover, the slope of channel boundary lines is a significant definition of support or resistance WITHIN the channel itself, namely in the period of November 22, 2011 to January 11, 2012, when price action continually bounced from a trendline of the same slope as the price channel. This trendline is shown as a dashed red line in the supplied screenshot above, just like the dashed red lines of the larger price channel.

In general, such behaviour is quite often in evidence; well-defined trendlines on a chart often have identical slopes (not merely similar ones). Indeed, a price channel is nothing but the coincidence of two trendlines with the same slope.

Back to the hourly chart, Friday’s price action brought BMC to exactly the upper bound of its 6-month price channel. If the channel is to not be breached, price action has only one way to go. Yet this certainly does not look like a sure bet. Friday’s rally advanced beyond BMC’s one-month high of $33.67, supporting the view that the current advance to the price channel resistance line will pierce that line and continue higher still.

The 5-minute chart (20 d 5m), finally, affirms the original thesis, namely that Friday’s close of $34.01 represents a point of significant resistance; on this zoomed-in perspective, price action has reached the resistance side of a relatively steep 2-week price channel. It’s shown below as a set of dashed yellow lines.

Still, a break upward in price would not be entirely unexpected; for instance, the Price Oscillator index, defined as the difference of current price to its 200-period moving average (with each period, in this case, marking one 5-minute bar) and shown in the lowest quarter of the screenshot above, is still some 30 cents below the past month’s global maximum.

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