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HEAD & SHOULDERS


Gap Inc. Forms an Inverse Head and Shoulders

05/01/03 12:03:25 PM
by Arthur Hill

Here is GPS with the mother of all inverse H&S patterns (well, maybe).


Security:   GPS
Position:   N/A

From February 2000 to October 2002, Gap Inc. (GPS) fell from above 50 to below 10. Most of the decline occurred from Feb-02 to Sep-01 and the stock has formed a huge 18-month base since Sep-01.

The pattern at work looks like a large inverse head-and-shoulders. The left shoulder bottomed in Mar-02 (11.85), the head in Oct-02 (8.35) and the right shoulder in Mar-03 (12.01). Neckline resistance at 17 has been tested at least three times and the stock is currently knocking on the door again. A move above 17 on good volume would be bullish and project further strength to around 25 (17 - 8.35 = 8.65, 17 + 8.65 = 25.65). The low of the head is subtracted from the neckline and this difference is added to the neckline to forecast the target.

Figure 1: Daily chart for Gap Inc.
Graphic provided by: MetaStock.
 
Volume confirmation is important for a head and shoulders pattern. The decline from May to October formed the low of the head and volume was relatively light (red arrow and red line). The rally off the low (October to December) witnessed an expansion of volume (green arrow). Expanding volume on the upside is bullish and validates the strong rally. After a pullback to form the low of the right shoulder, the stock advanced to resistance again (March to April). However, volume was relatively light as only one week managed to exceed the 40-week SMA (blue arrow). The pattern still looks viable, but any neckline breakout must be accompanied by above average volume to be considered robust and sustainable.



Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

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