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GAPS


Cutera Gaps In Bullish Rally

04/10/07 10:39:08 AM
by Chaitali Mohile

The bullish rally was struck by a gap down, whipsawing many long trades.



Security:   CUTR
Position:   N/A

Gaps are always unpredictable; there are numerous reasons for a gap breakout/breakdown. On Figure 1, Cutera Inc. gapped down suddenly amid the bullish rally. Technically, few reasons for a down move can be seen on the chart, but some strong news after closing can make a gap down. In Figure 1, the price moved closer to the flag & pennant target of $40. The previous high is another strong resistance for a bullish rally. Though the price broke out, the upside move was obstructed by the resistance.

FIGURE 1: CUTR, DAILY. Long-side traders were faced with a sudden gap down. Various technical reasons for a downfall can be seen on the chart, but the gap down was certainly unpredictable.
Graphic provided by: StockCharts.com.
 
The relative strength index (RSI)(14) became overbought at 70. Though it can remain overbought for longer periods, the weak rally can drag the indicator down. With a sudden gap down, the indicator moved to 30. If it holds there, then we can expect a relief rally. This gap down has also affected the well-developed bullish trend by sharply increasing the number of sellers.



How can this gap be traded? A massive fall can be expected if the price moves below this support, so traders can get a short position opportunity if this support is violated. If not, then some range-bound move is possible.



Let's see whether Figure 2, the weekly chart of CUTR, also has some strong support at $26. This chart has established support on the 50-day moving average, so now this adds strength to the $26 level. The bullish rally was not accompanied by enthusiastic volume. In addition, the RSI (14) made a lower high, indicating a lack of strength. The ADX (14) indicates a developing bullish trend, and until the price upholds its support of the 50-day moving average, the trend will remain up.

FIGURE 2: CUTR, WEEKLY. The stock price established support on the 50-day moving average.
Graphic provided by: StockCharts.com.
 
Considering both Figures 1 and 2, traders should keep away from this stock till some strong bullish indication can be seen. Otherwise, a gap down can cause a serious fall opening short.



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: 04/10/07Rank: 4Comment: 
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