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GAPS


Apollo Group Rallies On Gap Breakout

07/03/07 03:33:15 PM
by Chaitali Mohile

A gap breakout has generated buying opportunities and has also broken out of a trend reversal pattern.

Security:   APOL
Position:   Buy

If traded correctly, gap breakouts can be interesting. Gaps are unpredictable till they actually occur. Many major resistances get violated with a gap breakout. One such breakout has appeared in Apollo Group (APOL) (Figure 1). The high-volatility sessions range was violated by this gap breakout. The stock formed a doji candlestick recently, but a sudden gap up encouraged many buyers to go for fresh long positions.

FIGURE 1: APOL, DAILY. The upper-range resistance was crossed by a gap breakout.
Graphic provided by: StockCharts.com.
 
The stochastic oscillator (10, 7, 3) has moved to 80, indicating a positive sign for a bullish rally. The moving average convergence/divergence (MACD)(12, 26, 9) has remained positive after a strong bullish crossover. In addition, the average directional moving index (ADX)(14) at 21 is indicating a developing uptrend. Thus, all the indicators are positive, and fresh buying opportunities are available with a minimum target of $3. This profit level is measured on the upper range level (52) and an actual gap breakout (of approximately 55).

Figure 2 shows something more interesting. The monthly chart shows a long downtrend in APOL since mid-2004. The stock, which was worth $100 a share in 2004, moved to $35 in late 2006. The stock then bottomed out near the 35 level and began its upward journey. Currently, APOL has been forming an ascending triangle while moving upward, and traders can note that an ascending triangle in a downtrend is a trend reversal pattern.

For more confirmation about the trend, let's examine the ADX (14). The ADX (14) is 30, and +DI 22 is ready to move above -DI 23, indicating increasing buying pressure. This shows that bulls are ready to take over the trend.

FIGURE 2: APOL, MONTHLY. An ascending triangle was formed as the stock began its upside move. The gap breakout made the stock move above the triangle.
Graphic provided by: StockCharts.com.
 
But monthly is a very long-term view, so short-term trades can take a view about a trend reversal pattern only and not any buying position. For fresh buying, the target is set according to the daily chart (Figure 1). Those investors who are looking for long term investments can follow the monthly chart (Figure 2).



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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