Household name Clorox (CLX) has been forming what could be a broadening pattern on the charts.
Using your imagination, look at the price action of CLX from November (see the chart above). Starting in November the price of CLX has been working with wider and wider swings within a sideways pattern. Chartists call this pattern a broadening pattern. It is difficult to trade as rallies and selloffs are not sustained. First, you get long and then you get out or short only to see prices reverse in the other direction again. Whipsawed. Prices are above the rising 200-day average but have traded back and forth around the 50-day average. The On-Balance-Volume (OBV) line turned up in August but has turned sideways. The MACD oscillator flirts with the zero line. Get the picture?
The $64,000 question -- how do broadening patterns resolve themselves? Broadening patterns can be either continuation patterns -- that is they continue the trend in force before the pattern formed, in this case up -- or they can be reversal patterns and change the direction of prices. For CLX that would mean a turn to the downside.
The longer-term chart of CLX, above, suggests an upside breakout but nothing is a 100% certainty with technical analysis. CLX is in a long-term uptrend with prices above the rising 40-week moving average. The OBV line is positive but the MACD oscillator is crossing well above the zero line. This MACD crossover should be considered a take profits signal.
So what is the bottom line? With broadening patterns you don't know if you will see five swings or seven swings up and down. Worst, you don't know if the pattern will continue higher or reverse to the downside. My answer is to wait and see. Let the market tell us what it wants to do. Call me chicken or whatever, but honestly I can't handicap this one any better.
Check out our additional coverage of Clorox today by Real Money columnist Chris Laudani.