Federated's Double Top

08/17/01 03:49:15 PM

by David Penn

Gapping down past a confirmation level, shares of Federated Department Stores may become the victims of an early spring/early summer double top.

Security: FD
Position: N/A

Consumer cyclical stocks such as retail stocks were among the first seized by those looking for a quick rebound in the markets early this year. As shares of companies like Federated Department Stores (FD) rose from less than 29 in December to nearly 50 by March, this rebound seemed as if it might indeed be in effect. However, after squeezing an extra month's worth of gains out of the general market's January advance, FD began to falter, slipping about 22% off its peak to about 38 by mid-April.

This correction retraced more than half of the stock's advance from December to March. Depending on the market conditions (i.e., an overall bullish or bearish market), a correction that retraces more than half of the previous advance can be quite significant, possibly tipping off whether or not a change in trend may be in the making. In the case of Federated, the correction led into a two and a half month long diamond-shaped correction from March to mid-May. Buying in mid-April helped raise the center portion of the consolidation area (giving it the diamond shape) and likely provided the fuse for the explosion that took FD to an unsucessful test of its early March high.

Consolidation at the breakout of this double top�could anticipate distribution and renewed selling.

Graphic provided by: MetaStock.

These two advances--the December/January advance that led to the March high and the spring rally--formed the two peaks which are suggesting the current double top in Federated Department Stores. The double top, no less than the head and shoulders top, is classic topping price action as a new high is retested after a period of a few weeks up to a few months. Like the summit of Mount Everest and its shorter but more perilous companion peak, K2, the double top appears on a price chart as a pair of mountains that tower over recent price action. Between the peaks is a significant correction that retraces anywhere from 10% to 20% of the highest advance. Both peaks should be comparable in height, and a horizontal line cast from the lowest low between the peaks is called the confirmation line and marks the point at which the double top--with prices falling down the right side of the second top--is completed.

The price objective for a successful downside breakout can be estimated by subtracting the height of the double top from the value at the confirmation line. In the case of Federated, a confirmation level would be established at about 38.5, and a downside price objective of about 29. Interestingly, when prices gapped down in early July, prices held at a point just beneath this confirmation level. With double tops, prices often move down beneath the confirmation line, then rally or pull back, testing the line for resistance. Vigorous testing of this line has been going on since July, and there is little price support for FD between 39 and 35, where an accumulation area from the fall of 2000 remains.

A last note on the downside price objective of 29: given the two-month consolidation in autumn 2000, it is reasonable not to be interested in waiting around for a falling FD, even a precipitously falling FD, to crash down through as much as six points in the consolidation. That said, it is also reasonable that, should FD find itself back into a range similar in size to the autumn 2000 range, a price objective of 29 might be reached during one of the more downward oscillations.

David Penn

Technical Writer for Technical Analysis of STOCKS & COMMODITIES magazine, Working-Money.com, and Traders.com Advantage.

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DOUBLE TOPS

Federated's Double Top

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