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EXHAUSTION GAP


An Exhaustion Gap For Radio Shack?

04/07/06 09:32:56 AM
by Arthur Hill

Radio Shack remains in a downtrend, but managed to firm immediately after a big gap -- which may turn into an exhaustion gap.

Security:   RSH
Position:   Hold

Despite a nice rally in the major indexes this year, Radio Shack (RSH) remains down in the dumps and recorded a new 52-week low in early April. The stock is underperforming the broader market and the April gap down only adds insult to injury.

FIGURE 1: RADIO SHACK. Quickly after a gap down, RSH managed to firm and form a doji on the day (red oval).
Graphic provided by: MetaStock.
 
Despite this gap down, the stock managed to immediately firm and form a doji on the day (red circle, Figure 1). A doji forms when the open and close are relatively equal. It looks a bit like a cross (+) and signals sudden indecision. In this case, buyers were not deterred by the gap, and this is positive. The stock opened lower the next day, but managed to move higher by the close and form a modest white candlestick. This also shows buying pressure and reinforces support around 18.5.

Firmness is one thing, however, and a rebound is another. The stock established resistance just below 20 over the last five to six weeks. It would take a move above 20 to fill the gap, break the blue trendline, and exceed resistance. This would make the gap an exhaustion gap, and such resilience would be short-term bullish. The first upside target would be resistance around 23 from the January highs (gray rectangle).

The Chaikin money flow shows that selling pressure is easing but has yet to turn into actual buying pressure. This indicator is based on the relationship of the close relative to the high-low range. Closes above the midpoint of the range imply positive money flow (volume), and closes below the midpoint imply negative money flow. Unlike on-balance volume, this indicator is not concerned with the price change from close to close, but rather the price action on that given day. The Chaikin money flow moved below -40% in February and March. With the decline over the last seven days, the indicator has remained around -10%. It is still negative, and traders should watch for a break into positive territory to confirm a breakout in the stock.



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.

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Date: 04/07/06Rank: 5Comment: 
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