Figure 1: Daily chart of Gap Inc.
This head and shoulders formed over the last three to four months and the pattern features a falling neckline (green trendline). The left shoulder formed in July, the head formed with the early September peak at 21.3 and the right shoulder appears to be taking shape with the October high around 20. The falling neckline reflects selling pressure as the stock broke the August low of 17.4. The pattern would be confirmed with a neckline support break around 16.8 and this would in turn project further weakness to 12.8 (21.3 - 17.3 = 4, 16.8 - 4 = 12.8).
|Figure 2: Recent gaps in the head and shoulders pattern are highlighted with arrows.|
|Graphic provided by: MetaStock.|
|Recent gaps confirm weakness. The early September gap (blue arrow) occurred on high volume and signaled a sudden change of heart among traders and investors. The stock managed to recover, but the gap then provided resistance at 20 in mid-October. Also note that the stock gapped higher on October 9th with a surge in volume (red arrows). Even though the advance continued over the next four days, volume was below average and declined as the stock advanced (red line). Advances depend on volume (fuel) for sustainability and lack of volume increases the likelihood of a failure. With the decline over the last four days, volume has increased and the gap is in jeopardy of being filled, which would be bearish. The October 9th gap should offer support, but if filled on above average volume, the prospects of a neckline support break would greatly increase.|
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