PPDI Regaining Strength

06/18/10 11:32:32 AM

by Chaitali Mohile

The bullish breakout of Pharmaceutical Product Development is likely to increase demand for the stock.

Security: PPDI
Position: Buy

After an exclusive advance rally, Pharmaceutical Product Development (PPDI) gapped up in April. Gap occurrence is unpredictable and a news-sensitive event. The gap up in Figure 1 took PPDI to an intermediate high, but the filled black candle that followed was not a convincing sight for buyers. The long upper shadow shows that the intraday close was below the day's high. Such a close is considered to be a bearish indication. In addition, an overheated uptrend indicated by the average directional movement index (ADX) (14) and an overbought stochastic (14,3,3) suggested the possibility of a new downside rally. PPDI did drop down a few points from an intermediate high, filling the gap formation. The downside rally formed a falling wedge or a bearish flag as seen in Figure 1.

During the flag formation, PPDI formed lower highs and lower lows. The long bearish candles in Figure 1 reflect the bearish forces as well as the short-selling becoming stronger with every declining peak. The declining uptrend strengthened the selling pressure on the downside rally of PPDI. This rally formed a bullish flag & pennant formation on the daily time frame in Figure 1. We can see that the pattern has already broken upward and established support at the 50-day moving average (MA), but low volume is a point of concern. Along with the MA support, the upper trendline of the flag is the support for the breakout rally. The moving average convergence/divergence (MACD) (12,26,9) (see the marked circle) is ready to surge in positive territory. The downtrend is declining, and the stochastic oscillator has moved in a bullish area above 50 levels. Therefore, the breakout is likely to sustain the 50-day MA support.

FIGURE 1: PPDI, DAILY. The bullish flag & pennant breakout has established support at the 50-day MA.

Graphic provided by: StockCharts.com.

Hence, traders can consider triggering long positions above $27 with the target of 29.5 - 22.5 = 7 + 26 = 32. The rally from $27 toward the estimated target of $32 would bring handsome gains. However, the rally is likely to face resistance at the previous resistance of $29.5.

FIGURE 2: PPDI, WEEKLY. After the breakout, the stock has the 200-day MA resistance.

Graphic provided by: StockCharts.com.

The bullish flag & pennant formation has also appeared on the weekly time frame in Figure 2. Although this bullish continuation pattern is commonly found on the technical charts, when it is formed on two different time frames of a particular stock, the pattern becomes most reliable. Therefore, the formation in Figure 2 can be considered for trading after the confirmed breakout. The ADX (14) reflects a developing uptrend, the MACD (12,26,9) has steadily climbed the positive region, and the stochastic oscillator has bullish support of the center line at 50 levels. Thus, the breakout in Figure 2 is under way. The target of $32 remains the same, even for medium-term traders. Here, the rally has resistance of the 200-day MA, which coincides with the previous high resistance on the daily time frame. Therefore, PPDI is likely to undergo robust volatility near 29.5 and 30 levels.

To conclude, PPDI is a good stock to go long at $27 with a target of $32 and profit booking in the range of $29.5 or $30.

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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PPDI Regaining Strength

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