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Cisco Feels The Heat

11/15/07 02:25:04 PM
by Chaitali Mohile

Cisco hit its all-time high with a small gap up. The gap leaves a perfect example of an exhaustion gap, followed a bearish rally.

Security:   CSCO
Position:   N/A

Cisco System (CSCO) witnessed an exhaustion gap after an extensive advance rally. Exhaustion gaps, as the name suggests, exhaust the one-sided movement, and a temporary change in trend is seen. The bullish rally ($28.50 to $33.50), with a four-point correction in between, reached an all-time high of $34.50 with a small gap up. Meanwhile, when news of the quarter's results were announced, there was a sudden drop in demand. The gap proved to be an exhaustion gap, which hardly sustained for the day. Among the four types of gaps -- breakeven, common, runaway, exhaustion -- runaway and exhaustion gaps are often confused. Though gaps are difficult to trade, they get filled quickly. Like technical analysts say, even exhaustion gaps get filled faster though that is temporary. The exhaustion gap got filled immediately next with a huge downward plunge, losing $2 on a single day.

The havoc continued, with a next gap down followed by others. With just two gaps down and lower trading sessions, the stock gave up entire gains of two months. Predicting such harsh effects of a small exhaustion gap is highly difficult. Such gaps can only be watched with no shorting but traders must look for profit booking opportunities. The first gap down (Figure 1) broke down a wide range of another $1, making it a breakeven gap with huge selling volume. Another gap-down opening session on November 9 made a low at 28, with most long positions winding up.

FIGURE 1: CISCO, DAILY. The moving average convergence/divergence (MACD) (12,26,9) was dragged in deep negative territory due to two consecutive gaps down. The recovery in the RSI(14) and price as well should be looked at for a low-risk buying opportunity.
Graphic provided by:
The entire gap down following an exhaustion gap didn't allow any short positions. The second gap down (Figure 1) got filled faster, opening fresh buying opportunities. The relative strength index (RSI)(14) is bouncing back to bullish levels, indicating no further fall. Therefore, a bearish slide is likely to settle at 28 levels, and a new bullish ride to begin soon.

Exhaustion gaps are rare events, though those effects can be unimaginable. They lead to temporary trends so they need to be tackled carefully. Cisco is likely to create fresh trading positions as two gaps down start filling up.

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
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Date: 11/25/07Rank: 5Comment: 

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