An Exhaustion Gap For E Trade

05/04/07 11:08:53 AM

by Arthur Hill

E Trade gapped down in mid-April but filled that gap with a high-volume advance. The stock's downtrend over the last few months is reversing.

Security: ETFC
Position: Accumulate

The advance over the last few weeks created an exhaustion gap for E Trade Financial Corp. (ETFC), and this is bullish. The exhaustion gap forms in the direction of the underlying trend, which was down in this case. It shows that the bears are still very much in control of the trend. However, the stock managed to firm and filled the gap with a pretty impressive rally. This makes it an exhaustion gap and it shows that the bears are losing their punch (see Figure 1).

FIGURE 1: ETFC, DAILY. The advance over the last few weeks has created an exhaustion gap, and this is bullish.

Graphic provided by: Telechart 2007.

In addition to the exhaustion gap, the stock broke above the January trendline and April high this past week. There are three steps to a trend change, and ETFC has completed two. The stock broke the downtrend line and forged a higher high. The third and final step would be a higher low on any pullback.

FIGURE 2: ETFC, DAILY. Even though there were two declining days on heavy volume in April, there were five up days with above-average volume (black bars), showing strong buying pressure.

Graphic provided by: Telechart 2007.

Volume validates the breakout. Even though there were two declining days on heavy volume in April (red bars, Figure 2), there were five up days with above-average volume (black bars), which shows strong buying pressure. This was also enough to power on-balance volume (OBV) to a new high and totally negate the two big down days. OBV adds volume on up days and subtracts volume on down days. This indicator shows that volume on the up days has been stronger than the volume on the down days. Volume is fuel, and this high-volume breakout has the fuel to continue higher.

Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

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An Exhaustion Gap For E Trade

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