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FIBONACCI


Finding a Target for D&K Healthcare

04/15/03 08:33:37 AM
by Gary Grosschadl

This healthcare play has made a sizeable move from its bottom. How far can it run?

Security:   DKWD (Nasdaq)
Position:   Buy

The weekly chart of D&K Healthcare (DKWD) shows that the 20-period EMA has been a prominent feature in this stock's movements for over two years. During its dramatic climb from $5 to $40, this EMA has been strong support. When it finally made a sustained move below this moving average support in a swift downturn, what was support quickly turned into resistance. During the dive down from $30, DKWD only touched the 20-period EMA line once and never closed above it on the weekly chart.

Now seven months after falling below the $10 threshold, the stock has finally managed to rise above its 20-week EMA. This could very well mark another important turning point for DKWD. It's time to take a hard look at further upside possibilities using several tools.

DKWD weekly chart.
Graphic provided by: StockCharts.com.
 
The most prominent candlestick on this chart is hard to miss. I will use retracement targets from the stock's low to the top of this huge candle to help provide upside targets that make sense. Using principles of Fibonacci ratios (Fibonacci was a 13th century mathematician who derived a special sequence of numbers and ratios that many technical traders use), I have marked the most commonly used ratios on the chart. The 38.2%, 50% and 61.8% levels are all reasonable targets, especially the 50% mark. I favour the 50% mark for several reasons. This area represents close proximity to the 50- and 200-period EMAs, near mid-candle resistance of both the largest candle in question and a large white candle from May 2001. The 38.2% level at $13.63 lines up with a previous congestion zone which could become resistance going forward. Whether this becomes a mere resting point or something more substantial remains to be seen. Should the stock make a bullish surge past the 50% retracement level of $15.57, then the 61.8% could become serious resistance at about $17.50. Note this relates to the top of a large white candle and this level was tested successfully several months later.

Further clues may come from the displayed indicators. The DMI or directional movement indicator on top of the chart shows the three components of ADX, +DI and -DI. Currently a high ADX level is prompting the DIs to converge, signaling an important reversal taking shape. If bullishness continues, the DIs will cross representing a shift of control to bullish power (+DI) from bearish power (-DI).

The ideal bullish setup occurs when ADX is in between both DIs and ADX is still rising with +DI on top. The MACD (moving average convergence/divergence) shows a bullish setup as does the RSI (relative strength index). A cautionary note is that the 50 RSI level is an important level and a stall danger has to be considered. Likewise stochastics is in overbought territory. In a strong trending market, stochastics can stay in overbought levels for extended periods but high levels do bear watching for sudden downturns all the same.

In summary, several upside targets are outlined and traders should watch for reversals at or near these points. Support from a rising 20-period EMA may also be a good guide going forward. Small retracements to this line are acceptable for the patient trader but a serious breach below could mean a hasty exit for those wanting to protect profits. Should the stock rise well above the 20-period EMA then a trailing stop-loss would be advisable, perhaps using a shorter moving average such as the 10-period EMA. The daily charts should also be taken into account in a similar fashion.



Gary Grosschadl

Independent Canadian equities trader and technical analyst based in Peterborough
Ontario, Canada.

Website: www.whatsonsale.ca/financial.html
E-mail address: gwg7@sympatico.ca

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