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CONSOLID FORMATION


Is Golden Telecom Likely To Consolidate?

01/18/07 02:01:43 PM
by Chaitali Mohile

Traders should be cautious, with this stock moving near its target.

Security:   GLDN
Position:   N/A

A consolidation is healthy since it strengthens the rally that follows on its trip up or down, making the stock a strong candidate. During a consolidation the stock is likely to move in a range. The upper level of the range is resistance, and the lower level is support. During the uptrend, after the resistance is broken, it is possible to open new long positions. But if the support line is broken, then the stock is likely to test its previous lows. Hence, traders and investors should think twice before deciding to trade the consolidating market.

When the stock moves closer to its target, you should watch it carefully. New buying opportunities in such a stock is difficult. In fact, you should avoid long positions till the stock consolidates or moves to the previous low of the rally.


FIGURE 1: GOLDEN TELECOM, DAILY. GLDN is in a strong uptrend, shown here. With every high, the stock has returned back to its previous support.
Graphic provided by: StockCharts.com.
 
Figure 1 shows that Golden Telecom (GLDN) is in a strong uptrend. With every high the stock has returned to its previous support. Moving averages act as strong support levels, and they are also good rally indicators. In Figure 1 the relative strength index (RSI) (14) has indicated three buying opportunities at different levels. Note that whenever the RSI moved up to the 70 level, it has turned back to 50. In addition, the price held support at the 20-day moving average as well as the lower line of channel. The average directional movement index (ADX) (14) is above 30, indicating a strong uptrend, so fresh buying was possible during this move with the target of $56.



But now the price has already reached as high as $52. Traders can only enter the stock if the RSI turns back or the stock consolidates. The trend still remains strong with the ADX moving high. The stock needs to consolidate at the $52 level for an opportunity to open a long position. The target is calculated considering the previous rally from $39 to $48. By adding $9 to the recent rally from $47, we get the target of $56.



FIGURE 2: GOLDEN TELECOM, WEEKLY. As seen here, the stock moved up almost $20 from its lowest point at $32.
Graphic provided by: StockCharts.com.
 
In Figure 2 you can see that prices moved up steeply after a breakout at $32 from a long consolidation. The stock has moved up almost $20 from $32. The RSI (14) is highly overbought at almost the 80 level. Since the RSI can remain overbought for a longer period, traders should also look for other indicators as well. The ADX (14) is also overheated at 45 level. The moving average convergence/divergence (MACD) (12,26,9), after a bullish crossover of its trigger line (9), has remained positive. This overall scenario points out that the stock is likely to consolidate before moving further.


The fresh target on a weekly basis can be calculated only after consolidation. The traders and investors already long this stock should keep a tight stop-loss at $45, but buy only after the breakout from the consolidation. To conclude, a stock that is overheated is likely to consolidate soon.





Chaitali Mohile

Active trader in the Indian stock markets since 2003 and a full-time writer. Trading is largely based upon technical analysis.

Company: Independent
Address: C1/3 Parth Indraprasth Towers. Vastrapur
Ahmedabad, Guj 380015
E-mail address: chaitalimohile@yahoo.co.in

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