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CONSOLID FORMATION


CheckPoint Consolidates After Gap

04/25/06 12:48:13 PM
by Arthur Hill

Checkpoint Systems gapped down in early March and has yet to recover. Signs of distribution within the consolidation suggest a downside break.

Security:   CKP
Position:   Sell

CheckPoint Systems (CKP) gapped below 27 in early March, and that gap remains unfilled (black circle). The gap is considered bearish as long as it remains unfilled, and it would take a move above 28.6 to close it. This gap also signaled an abrupt trend change with the move below the February low.

This gap is also considered a breakaway gap. As a trend-changing breakaway gap, the odds favor a continuation lower, and I am watching the current consolidation for the next signal.

FIGURE 1: CHECKPOINT SYSTEMS. CheckPoint gapped below 27 in early March and that gap remains unfilled (black circle).
Graphic provided by: MetaStock.
Graphic provided by: MS Quotecenter.
 
The stock consolidated between 27.6 and 26 during the last five weeks (Figure 1), and the Bollinger Bands have narrowed considerably. This shows that volatility is contracting. In addition, neither bulls nor bears are showing any conviction, and as a result, a stalemate has developed. A break above 27.6 would signal a bullish resolution to the stalemate and a break below 26 would be bearish. This would signal a continuation of the early March decline and target weakness to the low 20s.

Chaikin money flow (CMF) has moved into negative territory, and this points to a downside break. It is hard to assess what exactly is happening within a consolidation, and I like to use volume-based indicators for clues. Chaikin money flow is negative when signs of distribution are present and positive when accumulation is the order of the day. There were signs of accumulation up until early April, but these have quickly disappeared and CMF moved into negative territory. CMF now shows signs of distribution, and this favors a downside break.



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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