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BOLLINGER BANDS


Gap Slows To A Crawl

04/14/05 08:33:34 AM
by Arthur Hill

Gap (GPS) has traded in a tight range the last few months, and the narrowing Bollinger Bands indicate that a move is likely sooner rather than later.

Security:   GPS
Position:   Accumulate

On the price chart, Gap (GPS) has traded between 20 and 23 for the past six months. Since the December low, the stock has formed a series of higher lows, but cannot break out of this range. The pattern from November to April looks like a symmetrical triangle, and its resolution will dictate the next directional move. A break above 22.68 would be bullish and a break below 20.70 bearish. See Figure 1.

Key indicators confirm the consolidation. The moving average convergence/divergence (MACD) has been trading near the zero line as momentum slows to a crawl. Similarly, the Bollinger Bands have narrowed as volatility contracts. The Bollinger Band differential shows the difference between the top and the bottom band. This indicator dipped below 0.05 for the third time this year (red dotted line). Prior dips preceded an increase in volatility, leading me to believe that GPS is ripe for a move sooner rather than later. But which way?

Figure 1: GPS. For Gap Inc. stock, the pattern from November to April looks like a symmetrical triangle, and its resolution will dictate the next directional move.
Graphic provided by: MetaStock.
Graphic provided by: Reuters Data.
 
Good question -- and I am glad you asked! Neither the triangle nor the Bollinger Bands provide any clues on the direction of the potential breakout. However, relative strength does. While the Standard & Poor's 500 and Nasdaq swooned in March, Gap Inc. has held up quite well and outperformed. In addition, the stock forged higher lows throughout 2005. This leads me to believe -- at least guesstimate -- that the break will be up.



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.

Title: Editor
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