Hewlett-Packard (HPQ) - Get Report transformed itself from a major player in the personal and business computing market into an industry superstar after it bought Compaq Computer in 2002. The Palo Alto tech giant then added to its elite status with the acquisitions of Electronic Data Systems in 2008, 3Com in 2009 and Palm just one month ago.

So why has Hewlett's stock been such a weak performer in recent years, compared to industry peers


(AAPL) - Get Report



(IBM) - Get Report

? The answer lies in dwindling margins for the computers, workstations and printers that make up the majority of the company's product line.

Of course, multiple acquisitions are trying to address that issue, with the company branching out into more lucrative tech markets. Although the next chapter of this success story might need to wait for a stronger world economy, this massive diversification should ultimately translate into rapid growth in the next three to five years.

With the future looking so bright, is now the right time to take the plunge and buy Hewlett stock? Let's try to answer that question with a thorough review of the charting history, focusing on key price levels that might come into play as this American icon reinvents itself.

The company embarked on a 10-year uptrend in 1990, rallying from $2.43 to a 2000 high at $69. The stock split twice during this benign period, 2-for-1 in 1995 and again in 1996. It topped out in June 2000 and hasn't challenged that price level in the last decade, despite two bull markets.

It gave up the majority of the 10-year advance during the 2000-to-2002 bear market, finally bottoming out near $11 in July 2002. Amazingly, the stock has been stuck within the range of that steep decline for the last eight years. It entered a three-year basing pattern after the deep low, finally breaking out above resistance near $25 in mid-2005.

The rapid ascent between 2005 and 2007 doubled the stock price to $53.48, raising hopes it would challenge the 2000 high and break out to an all-time high. The credit crisis changed all that, spurring a furious downtrend that unfolded in multiple selloff waves, dropping price into the top of 2005 breakout support and the 62% retracement of the two-year uptrend.

Hewlett bottomed out with the broad market in March 2009 and entered a strong recovery that went vertical in July 2009 after it cleared resistance at $40. The rally completed a 100% retracement, returning to the 2007 high just five months ago. It pulled back for a few weeks and bounced, exceeding that level by less than 2 points in April prior to selling off in the "flash crash."

Price structure off the 2009 low shows an Elliott Wave 5-wave rally, with an aborted fifth wave yielding a double-top pattern with support near $47. It's unusual that the stock broke that support without printing at least one lower high. This adds an element of chaos to the weekly chart because it's generated a broadening formation, better known as a megaphone pattern.

The megaphone shows higher highs and lower lows, making it difficult for interested buyers or sellers to find attractive entry points. In other words, the stock could trade up to the mid-$50s or down to the low $40s and not still affect the current technical outlook. This is an unacceptable scenario for most market-timing strategies.

However, this chaotic pattern will change when the stock finally carves out a lower high or a higher low. Unfortunately, we don't know which one of these events might happen first. That's a big problem because a lower high will point to a steeper downtrend while a higher low will support a recovery back to the April high.

Hewlett stock dropped from $55 to $42 in the recent decline and has now bounced up to $48.50, which marks the 50% selloff retracement. Note how the 50-day and 200-day moving averages are converging quickly at the same price level (red circle). There's also an unfilled gap between $48.20 and $48.60 from the May 14 selloff.

This convergence points to a major resistance level that will dictate the stock's fate heading into the third quarter. In a nutshell, a breakout through this price level will support a continued recovery effort and an uptick that might reach as high as the 78.6% retracement near $52, or even the April high.

Conversely, a downswing off this major inflection point could set up a breakdown through three-week support at $44 and expose the stock to a continued selloff that tests the "flash crash" low at $42. That would be bad news because a breakdown through that deep low would open the door to a renewed bear-market decline.

Let's end this analysis on a positive note. Go back and look at early-2008 price action on the weekly chart. The stock dropped into the same level as seen in the "flash crash" during the

Bear Stearns

event (red line) and then bounced up to $50. This is fractal behavior that tells us the deep May low marks hidden support that could come into play in the weeks ahead.

Specifically, a recovery that lifts into the April high would carve the next stage of a huge cup-and-handle breakout pattern, with a rally through that level finally bringing the 10-year high into play. That's asking a lot in current adverse environment, but it makes perfect sense if the Europe-driven correction is just a minor setback in the new bull market.

At the time of publication, Farley was long AAPL and IBM, although holdings can change at any time.

Alan Farley is a private trader and publisher of

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, a comprehensive resource for trader education, technical analysis, and short-term trading techniques. He is also the author of

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, due out in April. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks.

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