Checking on a Top in the Making

This pattern takes time to build, but the signs are unmistakable.
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Take a look at the chart below. What do you think of it?

It has lots of support down at those lows, it's broken the downtrend line, and it's even recently made a higher low. It even had a little gap higher this week.

Can you see the bottom?

But don't get too excited about this chart being a bottom and start wondering which stock it is. I've taken a chart and flipped it upside down, so you aren't seeing an accurate picture. You see, sometimes when folks are bullish, all they can see is the good side of a chart.

So if you thought this was a pretty good base and you liked the chart enough to want to buy it, then you really ought to be able to acknowledge that it's a top in the making, not a bottom.

That broken downtrend line is actually a broken uptrend line. Those higher lows are actually lower highs, and that gap higher is actually a gap lower. And the chart? It's

IBM

(IBM) - Get Report

.

Now that you've opened your mind to the possibility that tops exist out there, take a look at what IBM really looks like.

One month ago, I

suggested that IBM had a top forming. It still does, but look at how long it's taking to form that top. Maybe it's easier to see if you're used to bottoms instead of tops, but you should note that IBM has really now broken two uptrend lines, both on gaps lower. It's now coming into some support in the $78-to-$80 area, and I expect it to find support there and bounce from that level, especially as the market heads toward an oversold reading.

Once it bounces off this support, we'll then be able to draw in a third uptrend line. That's the one to watch very closely because if and when IBM breaks that third uptrend line (the third one is usually the nail in the coffin), it will be breaking support at the same time.

From this chart, you can see how much time a top takes to build, so IBM probably still has some time left before it completes its top.

Overbought/Oversold Oscillators

For more explanation of these indicators, check out The Chartist's

primer.

Helene Meisler, based in Shanghai, writes a technical analysis column on the U.S. equity markets and updates her charts daily. Meisler trained at several Wall Street firms, including Goldman Sachs and SG Cowen, and has worked with the equity trading department at Cargill. At time of publication, she held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. She appreciates your feedback and invites you to send it to

Helene Meisler.