Gap Continues Lower

06/28/06 10:52:16 AM

by Arthur Hill

Gap Inc. looked like it was basing a few months ago, but a recent support break signals a continuation of the long-term downtrend.

Security: GPS
Position: Sell

Let's start with the weekly chart for some perspective (Figure 1). The stock declined sharply in July–August 2004 (gray box) and then formed a big triangle consolidation. It was two to three months down and then 11-12 months flat in the triangle. The stock continued lower with a support break in August 2005 (red oval) and bottomed in October. It was another two- to three-month decline and then an eight- to nine-month consolidation unfolded (second triangle).

FIGURE 1: GAP, WEEKLY. This stock dropped in the July–August period (gray box) and then formed a triangle consolidation.

Graphic provided by: MetaStock.

It now looks as if this consolidation has ended, as GPS signaled a continuation lower with a move below the lower triangle trendline and April low. The downside target is around 14 over the last two to three months. I found this target by drawing a falling price channel and extending the lower trendline into September.

There are bearish developments on the daily chart, too (Figure 2). Gap Inc. broke the lower triangle trendline with a sharp decline below 17.5 (gray oval). A flat flag then formed, and this is a continuation pattern (blue lines). A move below the flag low (17.2) would signal a continuation lower and target a move to around 16.5.

FIGURE 2: GAP, DAILY. The bearish consolidation could also be seen in the daily chart.

Graphic provided by: MetaStock.

The flag also established resistance just below 18 and this gives the bears a point to be wrong. Failure to move lower and a break above 18 would show resilience and negate this bearish prognosis.

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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Gap Continues Lower

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