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STOCHASTICS


A New Trend For Target

01/17/07 08:32:04 AM
by Arthur Hill

After trading range-bound for three months, Target broke through resistance to signal the start of a new trending phase.

Security:   TGT
Position:   Accumulate

Prices are either trending or nontrending. A trading range or consolidation represents a nontrending phase when prices move sideways. A range break often signals the end of a nontrending phase and the beginning of a trending phase. A trending phase is a sustained advance or a sustained decline. After a period of trending, prices often move into a nontrending phase in preparation for the next trending phase. It is difficult to predict the length or duration of these phases, but analysis techniques can help identify a particular phase.

FIGURE 1: TARGET. In early September 2006, the stochastic momentum oscillator became overbought and remained so for 29 days (green rectangle).
Graphic provided by: TeleChart2007.
Graphic provided by: Telechart 2007.
 
The recent breakout in Target (TGT) spells the end of a nontrending phase and the beginning of a trending phase. Before looking at this breakout, let's look back at the early September breakout (Figure 1). TGT traded flat from mid-May to August and then broke range resistance with a strong move in early September. The move ended the nontrending phase and began a trending phase that lasted until mid-October — one and a half months. A nontrending phase then started and lasted from mid-October until early January. The recent breakout at 60 is bullish and signals the start of trending phase, and this points to a move higher.

Momentum oscillators, such as the stochastic momentum oscillator, can be used in both trending and nontrending phases. In a nontrending phase, momentum oscillators move from overbought to oversold levels quite often and do not remain overbought or oversold for extended periods. In a trending phase, momentum oscillators often become overbought or oversold for extended periods. In early September, the stochastic momentum oscillator became overbought and remained overbought for 29 days (green rectangle). This reflected the strong uptrend from early September to mid-October. The indicator once again turned overbought (>50) in early January, and I would expect TGT to trend higher as long as the indicator remains overbought. A move below 50 would show weakness in this trend and the breakout should then be questioned.



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
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