|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.|
Click here for more information about our publications!