|After a shock to the system with a quick decline from 21.3 to 17.6, The Gap Inc. (GPS) formed a rising flag on relatively low volume. The gap down and sharp decline signaled a sudden change of heart as traders dumped the stock indiscriminately. The flag represents a consolidation as traders digest the sudden decline. Notice that volume during the flag was relatively light as interest subsided (gray arrow).|
|Flags usually extend 1-3 weeks and are considered continuation patterns. In addition, flags usually slope in the opposite direction of the continuation move. A bullish flag slopes down as the continuation move is expected to be up. A bearish flag slopes up as the continuation move is expected to be down. A move below the lower trendline (18) would signal a continuation lower and project further weakness to around 15.3 (19 - 3.7 = 15.3). Flags are said to fly at half-mast and the projected move is equal to the initial decline (21.3 to 17.6 = 3.7).|
|Figure 1: Daily chart for GPS showing gap down and rising flag formation.|
|Graphic provided by: MetaStock.|
|Also of note, there is support between 17.4 and 17.8, the early August and early September lows, respectively. A move below 17.4 would further confirm the flag break and continuation lower.|
|In addition to the flag projections, retracements and prior resistance breaks can provide a downside target. The stock advanced from 12.01 to 21.3 over the last few months. The gray horizontal lines show the retracements with 50% and 62% the most likely. A 50% retracement would extend to around 16.7 and a 62% retracement to around 15.5. There is also broken resistance from the December high that turned into support in May (green line). At 15.85, this potential support level resides between the two retracements and close to the flag projection at 15.3.|
Figure 2: Retracement levels on the daily chart for GPS.
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