ATAC Creates New Opportunity

03/16/07 10:12:29 AM

by Chaitali Mohile

Aftermarket Technology is ready to move toward its previous high with a bullish engulfing pattern on its chart.

Security: ATAC
Position: Buy

When a big white candle completely engulfs the previous small black candle, a bullish engulfing pattern is formed. This candlestick pattern indicates an end to the declining rally of the stock. Aftermarket Technology Corp. (ATAC) has formed a bullish engulfing pattern on its daily chart (Figure 1). The red candle formed on March 13 is completely engulfed by the white candle formed on March 14. In Figure 1, the pattern has established support on a 50-day moving average. This adds strength to the formation and the possibility of an advance rally. The following bullish rally will lead toward the previous high at $25.50. Generally, a previous high pivot will act as resistance so traders may see some profit booking there.

FIGURE 1: ATAC, DAILY. A bullish engulfing pattern establishes support on the moving average.

Graphic provided by: StockCharts.com.

The average directional movement index (ADX)(14) at 22 shows a crucial turning point for buyers as well sellers. It shows a tough fight between bulls and bears to take over the charge of the trend. The bullish engulfing pattern indicates that the bulls take control of the stock, and as a result, the buyers' pressure is likely to increase in the ADX. The relative strength index (RSI) (14) at 55 opens the buying level for traders and investors. The RSI indicates the rally can successfully move in an upward direction with increasingly bullish force.

The overbought RSI must have weakened the rally from $25 that resulted in a correction of $5. In addition, the ADX (14) moved marginally above 40 with a sudden increase in buying pressure. But the rally after the bullish engulfing pattern looks more positive for fresh long positions, and hence, traders can buy with a previous high of $25 as a short-term target. The healthy rally can travel even above $25.

FIGURE 2: ATAC, WEEKLY. This stock moves upward, making higher lows.

Graphic provided by: SuperCharts.

Higher lows are a bullish indication on charts. The stock that gives such an indication runs faster. Traders can catch these moves considering strong supports only. In Figure 2, ATAC has also made higher lows and now stands on strong support of 50-day MA. Though the price slipped from $25.50, the RSI held its support strongly at 50, indicating strength in rally. The price pulled back immediately and the RSI moved to 56, confirming the strength of the advance rally. The ADX (14) indicates a developing bullish trend.

Thus, the bullish engulfing can be treated as a signal indicator of a fresh upward rally. As candlestick patterns are short-term patterns for more confirmation, some strong indicators are used.

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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ATAC Creates New Opportunity

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