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CHANNEL LINES


Has The Long Correction Ended For Gap Inc.?

10/25/06 02:41:34 PM
by Arthur Hill

The decline in Gap Inc. from July 2004 to July 2006 looks like a massive correction that the October breakout just ended.

Security:   GPS
Position:   Accumulate

For retailer Gap Inc. (GPS), the weekly chart (Figure 1) shows a massive advance from 8.35 to 25.72 that lasted from October 2002 to June 2004. There were some minor pullbacks along the way, but the stock avoided a major correction. The stock peaked in June 2004 and began a long corrective process that lasted two years.

FIGURE 1: GAP INC., WEEKLY. This chart shows a massive advance that lasted from the end of October 2002 to mid-2004.
Graphic provided by: TC2000.com.
Graphic provided by: Telechart 2007.
 
Why do I think it is a correction? First, corrections do not retrace the entire advance. It is usually just a portion between 38% and 62% of the prior advance. This decline retraced 50–62% of the prior advance, and this is normal. Second, the decline was relatively orderly and formed a falling price channel. This pattern is also typical for a correction and represents a long period of slow selling.

With a big surge over the last two months, the stock broke above the upper channel trendline and exceeded the 2006 high. In fact, GPS recorded a 52-week high this month, and new highs are bullish. The breakout calls for a continuation of the prior advance and the upside target is north of 25.

FIGURE 2: GAP INC., DAILY. The stock is still battling resistance and has yet to make a clean break above the February high.
Graphic provided by: TC2000.com.
Graphic provided by: Telechart 2007.
 
On the daily chart (Figure 2), we can see that the stock is still battling resistance around 19.5 and has yet to make a clean break above the February high. However, the late September gap is holding and upside volume is outpacing downside volume. The stock closed above 20 this week on good volume. As long as the gap holds (18.5), I expect the stock to distance itself from resistance and move toward 25.



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
Company: TDTrader.com
Address: Willem Geetsstraat 17
Mechelen, B2800
Phone # for sales: 3215345465
Website: www.tdtrader.com
E-mail address: arthurh@tdtrader.com

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Date: 10/25/06Rank: 4Comment: 
Date: 11/14/06Rank: 4Comment: i think so too.
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