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RSI


Fresh Levels In Fossil

02/27/07 10:57:05 AM
by Chaitali Mohile

Fossil, Inc., looks like it's ready to move. Traders can see a target of $31 soon.

Security:   FOSL
Position:   Buy

Fossil, Inc. (FOSL), was moving under the resistance of its previous high of $24 (Figure 1). The stock was about to reach oversold levels when the price moved down from $24 to $15, but the relative strength index (RSI) (14) bounced from the 30 level and rallied to 70. As a result, traders can see a "V"-like move in the stock. The price also moved sharply toward the previous high. But due to a lack of strength, the RSI moved down to the 30 level, where it showed positive divergence. The price made a lower low, but the RSI held its 30-level support.

FIGURE 1: FOSSIL, WEEKLY. FOSL was about to go oversold when the price moved down from $24 to $15.
Graphic provided by: StockCharts.com.
 
Traders should always remember that though the RSI gave positive divergence, fresh trades are always risky on divergences. Divergence should be used only as directional indicators. The effect of divergence can be seen as price made higher lows at $16 and $17 and again tested its previous high. The RSI at current levels is marginally overbought and thus can lead the fresh bullish rally ahead. For the price to move above $24 strongly, some increase in volume is necessary. The breakout will lead to new level of $ 31. This target is calculated on the previous rally from $17 to $24, so by adding $7 to $24, the target is calculated.

In Figure 2, the stock is moving in an upward channel. This channel and the moving average direction indicates the uptrend of the stock. Whenever the price moved toward the lower line of channel, the RSI (14) too moved down to the 30 level. The RSI had established support twice, indicating the bullish strength of the rally. Finally, with increase volume the stock moved above the upper line of channel. This breakout will strengthen the move. The RSI at 70 is overbought, but traders can take long positions with the view of a breakout. At 50 level on the RSI, the buying opportunity was difficult because of trendline resistance.

FIGURE 2: FOSSIL, DAILY. FOSL appears to be in an uptrend.
Graphic provided by: StockCharts.com.
 
Traders and investors may want to consider going long though the RSI is overbought, as the indicator has a tendency to remain overbought for longer periods. Trades can be made with the target of $31.



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: 02/27/07Rank: 4Comment: 
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