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CHART ANALYSIS


Freds, Inc. Crossed Above 50-Day Moving Average

06/07/04 10:51:49 AM
by Steven Coffey

In addition to the moving average crossover, this stock has also gapped out of a mini cup and handle formation.

Security:   FRED (Nasdaq)
Position:   Buy

It's usually a good sign when a stock crosses above a moving average that acted as a significant resistance point in the prior downtrend. After a six month decline, Fred's Inc. (FRED) has just crossed above its 50-day moving average, which it rallied to three times prior without success. Since the moving average acted as a good point of resistance in the past, it should serve as support now that the price has crossed above it.

Graphic provided by: Stockcharts.com.
 
Looking at the chart, you can also see the formation of a six week long cup and handle pattern. While a cup and handle formation generally takes many months to develop, it's still worth noting here. A cup and handle is created when price consolidates while in a downtrend, moves lower, comes back up to the point of the prior consolidation and holds there for a little while, then breaks above that point on strong volume. This is what FRED has just done. What's more, it has gapped up above the "lip" of the cup and handle, adding more significance to the breakout.

Noting the oscillators in the bottom half of the chart, the MACD has reached a new six month high and has crossed above its centerline. Last month, the accumulation/distribution line crossed above its moving average. And the Chaikin money flow has reached a new high on this one year chart. All of this points to an increase in upward momentum that could push the stock higher. However, within the last couple of days, the A/D line has bounced downward off its early March low point. This could mean that FRED may hover for a few days, or even come down somewhat, before continuing upward. At the very least, the price should not go below the 50-day moving average. If it does, I would change my bullish outlook on FRED.

But in the final analysis, I believe this stock has already bottomed out and is starting to rise. Recently, it gapped above a significant resistance level and is not yet very much above that level, which offers a good risk/reward ratio. On top of this, it has crossed above its 50-day moving average, which at one point served as strong resistance. A good short-term target for FRED is $26. I have calculated this by subtracting the bottom of the cup and handle ($17) from the lip of the cup ($21.50) and adding that to the lip of the cup. This also coincides with this stock's early April high.



Steven Coffey

Steven Coffey is an independent stock trader with a background in Information Systems development and training. He resides in the Boston area.

E-mail address: stevencoffey@yahoo.com

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