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I wrote about the retail HOLDRS (RTH) on October 14 when the stock formed a bullish engulfing (September 22) and two hammers (October 13-14). The break above 94 seemed to confirm these patterns, but the stock quickly fell back to 90 with a gap and a long black candlestick on October 27. Despite this failed breakout, the stock held support and gapped higher two days later. With a gap down on October 27 and gap up on October 31, an island reversal has formed and a break above 95 would be most bullish. |
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FIGURE 1: RTH. While the stock closed below its September low last week, RSI formed a higher low, forming a bullish divergence as the indicator is stronger than the underlying stock (green line). |
Graphic provided by: MetaStock. |
Graphic provided by: MS QuoteCenter. |
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In addition to the bullish candlestick reversals and successful support test, the relative strength index (RSI) formed a bullish divergence. While the stock closed below its September low last week, RSI formed a higher low, forming a bullish divergence as the indicator is stronger than the underlying stock (green line, Figure 1). In addition, RSI broke the red trendline extending down from mid-July and now has an uptrend working since September 21. Momentum is moving in the right direction for the bulls. |
Mind the gap: An upside gap is bullish as long as it holds. The stock closed at 92.15 on October 28 and it would take a move below this level to fill the gap. This would negate the island reversal. Technically, the stock would still be in a trading range and it would take a move below 90 to break support and signal a continuation of the prior decline. Should the stock hold the gap and break above key resistance at 95, I would look for further strength toward the August support break at 99. |
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