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GAPS


FEIC Gives Gap Breakout Of Falling Wedge

02/22/07 01:53:03 PM
by Chaitali Mohile

A breakaway gap from a particular pattern reinforces the gap and the continuation of trend. FEI Co. is heading toward the target of $41.



Security:   FEIC
Position:   Buy

FEI Co. (FEIC) has given a gap breakout from a falling wedge. A falling wedge is a bullish pattern and its breakout is always upward. The usual style to trade the gaps is on consolidation, or by filling the gap. But a breakaway gap with heavy volume cannot get filled faster, so it can be bought at the upper level of breakout. In Figure 1, the relative strength index (RSI) (14) became overbought on a huge gap breakout. The volume maintaining marginally above average is also important, though it needs to increase. The moving average convergence/divergence (MACD) (12,26,9) has given a bullish crossover with great strength and remained positive then after. The average directional movement index (ADX)(14) is above 30, indicating developing a bullish trend.

Now, to trade this breakout, traders can buy above $32 with a target of $34.50. This target is calculated with the length of a falling wedge -- $2.50 ($25.50 - $27.50).



In Figure 2, FEIC can be seen seen breaking out of its long congestion period. The stock was consolidated for almost two years. The breakout above the range will signify the developing performance of the stock. As the price moved above $27, a dramatic increase in volume is seen. This strengthens the breakout move. As the stock moves out of its long consolidation phase, it should be bought. The RSI (14) has steeply moved to 75 with the drastic change in price. This indicator can remain overbought for a longer period so traders need not worry about decline. The ADX (14) also indicates the developing trend. Traders can thus take this positive sign for positioning themselves on the long side of the trend.



FIGURE 1: FEIC, DAILY. Breakaway gap from a falling wedge.
Graphic provided by: StockCharts.com.
 
The MACD (12,26,9) is equally positive to consider. Here, I would like to give a target of $41. The length of a congestion period is calculated and added to the upper level of a breakout. So by adding $9 ($18-$27) to $32, we get the target of $41. Accordingly, this target looks achievable.


FIGURE 2: FEIC, WEEKLY. FEIC moves out of a long consolidation period. Next, the target on breakout is $41.
Graphic provided by: StockCharts.com.
 
To conclude, the breakaway gap -- particularly from any pattern -- can be bought. And the breakout on heavy volume adds strength.



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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Date: 02/22/07Rank: 4Comment: 
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