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Gap Breakout Crosses Major Resistance

03/28/07 11:10:41 AM
by Chaitali Mohile

The 200-day moving average resistance was taken off by a huge gap breakout in Bel Fuse, Inc. On the breakout, the price established support on previous high pivot.

Security:   BELFB
Position:   Buy

BELFB made lower highs since mid-November 2006 and ultimately came under resistance of the 200-day moving average in March 2007. But BELFB smartly moved above this strong resistance, given a huge gap breakout of about $5 on higher volume. Such gap breakouts are tradable. Gap breakouts can be breakaway gaps, runaway gaps, or exhaustion gaps. A gap breakout can be traded either after consolidation or on testing its previous low after breakout. Trading after consolidation gives much safer entries to traders. In Figure 1, BELFB on the gap breakout took the support of a previous high, which otherwise is another strong resistance. The good volume moves assure the stability of the breakout.

FIGURE 1: BELFB, DAILY. A gap up broke out of strong resistance of moving averages.
Graphic provided by:
Traders should watch the consolidated move of the stock before taking any long trades. The relative strength index (RSI)(14) made higher lows when price was under the 200-day moving average resistance. This indicates the RSI was already on its way up to the bulls. Many times, indicators signal that a move is forthcoming. Smart traders, however, don't position themselves according to the indicators but go along with the price movement. With the gap breakout the RSI(14) moved above 70, indicating a bullish rally.

The average directional movement index (ADX)(14) throughout Figure 1 has not moved above 30. The indicator moved with equal buyers and sellers pressure, so bulls and bears both failed to grab the trend. The gap breakout suddenly increased the buyers' pressure. The ADX(14) also turned above 10, indicating a developing bullish trend. Traders may want to consider this stock above $40 to further target. No specific target is possible as BELFB may consolidate with support of $38. Both the indicators are giving bullish signs.

FIGURE 2: BELFB, WEEKLY. BELFB faces previous high resistance. Above this resistance, a fresh rally can be expected.
Graphic provided by:
The gap breakout on the daily chart has established a support of $38, its previous high, but Figure 2, the weekly chart, shows another resistance at $40. So the stock is likely to move in the range of $40-$38 during consolidation. The RSI(14) has marginally turned overbought at 64, indicating a healthy bullish rally ahead. The moving average convergence/divergence (MACD)(12,26,9) is also making a bullish crossover with the histogram moving above its zero line. The ADX(14) indicates a developing uptrend tailwind, and in addition, the price has the strong support of both moving averages.

Hence, the overall scenario points to a bullish rally above $40. The gap breakout on Figure 1 violated the two strong resistances, and Figure 2 shows another resistance, which may be crossed with volume.

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:

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Comments or Questions? Article Usefulness
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Date: 03/29/07Rank: 4Comment: 
Date: 04/06/07Rank: 5Comment: Do you have a scan for catching stocks which gapped the day before? How about stocks which are forming an ascending triangle?

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