International Business Machines (IBM - Get Report) rallied off a double bottom low that formed early this year and saw the stock price move up over 40%, advancing to the 62% Fibonacci retracement level of its 2013 high and 2016 low, which is currently intersecting with the long-term downtrend line drawn off the highs of that period. At this technical inflection point, an eveningstar pattern formed on the weekly chart that may have marked the end of the rally and a shift in the direction of the trend.
The highlighted eveningstar pattern is composed of a large white candle, followed by a narrow opening and closing range "doji" candle and completed with a large dark candle. It represents a transition from bullishness to bearishness. After the appearance of the pattern, the stock quickly dropped back to the intersection of the 50% retracement level and the uptrend line drawn off the lows of this year.
On this weekly timeframe, the stochastic oscillator moved out of an oversold condition and is tracking lower, and moving average convergence/divergence has made a bearish crossover, reflecting the loss of positive momentum. The accumulation/distribution line has crossed below its 21-period signal average, and Chaikin money flow dropped into negative territory. The price momentum and the money flow readings suggest that former bulls are taking profits.
The price action on the daily chart over the last several months formed a head and shoulders pattern, with the neckline in the $158 area. This month, the neckline support level of this second topping pattern was broken, along with the rally uptrend line, and the stock moved down to the $153.50 area where it has been consolidating.
The relative strength index and moving average convergence/divergence on this timeframe have been tracking lower and are under their center lines, and the vortex indicator, which is designed to identify early shifts in trend, has made a bearish red-over-green crossover. Money flow readings started turning lower during the second half of the formation of the head and shoulders pattern, and now momentum, short term trend and money flow indications on multiple timeframes are all pointing to a second breakdown and further retracement.
IBM is a speculative short trade after a lower candle close that penetrates the $153.50 support level, using a close trailing percentage buy-to-cover stop.