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WEDGE FORMATIONS


Opportunity In The Networking Sector

02/06/04 11:59:35 AM
by Ashwani Gujral

The Networking sector is undergoing a correction after a huge rally to the upside. This correction is happening on a bullish falling wedge pattern.

Security:   $NWX
Position:   Buy

Continuation patterns are small pauses in ongoing trends, when the market or the stock pauses for breath before continuing. These patterns offer a low risk entry into continuing trends and a close stop-loss. Buying into this pause as the market gathers momentum for a fresh upmove, reduces the likelihood of a trader catching a top or a bottom.

The beauty of these patterns are that the market has everything in place -- the direction and the target -- so nyou only have to shoot. The target for continuation patterns often is a similar sized move to the one that occurred before the pattern. Again, volume plays an important role in continuation patterns. Volume rises in the direction of the trend and declines during the continuation pattern. The consolidation should take place on considerably lighter volume. Volume should pick up again as the price breaks out for a fresh move. Traders are well advised to wait for a high volume breakout instead of preempting these breakouts. Let's have a look at the daily chart of the Networking index.

Figure 1: Daily chart of the Networking index.
Graphic provided by: Stockcharts.com.
 
A bullish wedge has formed as a countertrend to an upmove. The wedge's lines, forming the boundaries of the consolidation, keep narrowing on declining volume. The price finally breaks out to the upside, continuing the upmove. Bullish wedges can occur both as continuation patterns and reversal patterns. The Networking index is likely to be the first to bounce when the Nasdaq resumes its rally. The target for the subsequent upmove could be 375. The buy signal will come from the actual price breakout and the stochastics crossing upwards.


Figure 2: Weekly chart of the $NWX.

On the weekly chart, the Networking index is forming a doji which can often indicate the end of the correction, especially in light of the falling wedge on the daily chart. The ADX continues to look strong and the trend is in place. Thus there should be no harm in taking an entry using an oversold condition in the daily chart. This breakout can be used to take entries into the leading stocks in the Networking index. It is likely that they have similar chart patterns.



Ashwani Gujral

He is founder of AGIP Securities Pvt. Ltd. which offers money management services, live chat rooms (during market hours) and independent technical analysis consultancy. The company has a big media presence from the likes of CNBC, NDTV Profit, and ZEE Business.

Title: Chief mkt strategist
Company: AGIP Securities
India
Phone # for sales: 9871066337
Website: www.ashwanigujral.com
E-mail address: contact@ashwanigujral.com

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Date: 02/10/04Rank: 5Comment: Thank you for your input. I find your t/a style one of my favorites at traders.com. Keep up the great work.
Date: 02/26/04Rank: 5Comment: 
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