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First, let's look at the island reversal. Newmont (NEM) gapped up in early November, stalled for four days, and then gapped down (Figure 1). The four trading days between the gaps form the island. All long positions initiated on these four days are now trapped on the island with losses. |
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FIGURE 1: NEWMONT, DAILY. The island reversal shown here formed when the stock gapped up in early November, stalled for four days, and then gapped down. |
Graphic provided by: TeleChart2007. |
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The second gap held and has yet to be countered. A strong stock would have recovered after this gap. The inability to bounce and fill the gap shows weakness. Despite that weakness, NEM is trading near support and formed a consolidation over the last few weeks. I will be watching this consolidation for the next signal. |
The stock has a lot of support around 48. This support level stems from broken resistance, the August trendline, the 50-day moving average, and the November lows. A break below support would signal a continuation lower and target a move toward the next support level around 44. See Figure 2. |
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FIGURE 2: NEWMONT, DAILY. The combination of support at 48 and resistance just above 52 makes for a consolidation. |
Graphic provided by: TeleChart2007. |
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The combination of support at 48 and resistance just above 52 makes for a consolidation. Consolidations are neutral patterns that require a break for a directional signal. A break above the late November highs would be bullish. This would also start filling the gap and negating the island reversal. |
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