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DOUBLE TOPS


Staples Inc. Tests A Double Top

10/22/07 02:49:36 PM
by Gary Grosschadl

Staples is at a crucial point here, with pattern analysis suggesting a tradable move.

Security:   SPLS
Position:   Buy

This multiyear weekly chart shows a double top being tested (Figure 1). After the first peak near $27, a trough line was established at $21. Five months later the second top was established. Those "early bird" traders who surmised a double top could be in the making would have been correct, as a move near $21 did transpire.

For a double top to officially be in, the trendline has to be broken to the downside with some conviction. Should this happen with a close below $21, then the double-top completion target becomes $15 or near it. This six-point move is equal to the distance between the peak and the trough as applied to the downside move.

FIGURE 1: STAPLES, WEEKLY. This chart shows Staples at an important juncture.
Graphic provided by: StockCharts.com.
 
By the looks of the current chart, I would be betting the other way, to a move back up to challenge the $27 peak. The double top will be rejected at the current position, the support being the combination of the trendline (previous low) and the ever-important 200-period exponential moving average (EMA). This moving average often acts as significant support or resistance and many a trader or technically minded fund manager watches this level for the signs of a bounce.

The indicators below the chart lend themselves to a bullish view going forward. The moving average convergence/divergence (MACD) is at a low level with an uptick possibly emerging. Note the histogram is showing positive divergence, hinting at a potential upswing. The relative strength index (RSI) appears to have found support at 30 while the stochastic oscillator is reverberating in an oversold zone.

Should this bullish view prevail, the first hurdle is nearby overhead resistance offered by the 20-period EMA. Success there could signal a serious drive north to challenge previous highs.

However, another refusal at the 20-day EMA could drive the stock to once again test the support level between $21 and $22. Failure here could then bring the double-top completion target ($15) into play. Gentlemen, place your bets — $27 or $15?




Gary Grosschadl

Independent Canadian equities trader and technical analyst based in Peterborough
Ontario, Canada.

Website: www.whatsonsale.ca/financial.html
E-mail address: gwg7@sympatico.ca

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