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Gap-Down Resistance

09/30/10 03:09:23 PM
by Chaitali Mohile

The gap-down resistance of GTIV is likely to restrict its short-term bullish rally.

Security:   GTIV
Position:   Buy

Recently, the health-care sector witnessed a 200-day moving average (MA) bullish breakout on the daily as well as weekly time frames. Gentiva Health Services (GTIV) is one of the stocks in the health-care sector but does not show a bullish breakout. In Figure 1, GTIV breached the 200-day MA support with a huge gap down in July 2010. The bearish force was so strong that GTIV plunged to $19 without challenging the new gap-down resistance. The stock established support at $19 and formed an ascending triangle in Figure 1. The triangle is formed at the bottom of the corrective rally, indicating a bullish trend reversal pattern for the stock.

An overheated downtrend indicated by the average directional index (ADX) (14) is also a trend reversal signal, thus confirming the ascending triangle as the reversal pattern. The bullish breakout developed a fresh up trend for GTIV. The potential target of the breakout rally is 22 - 19 = 3 + 22 = 25. We can see in Figure 1 that the stock has retraced exactly from the estimated level and hit the immediate support of the 50-day moving average (MA). Since the calculated target and gap-down resistance are at the same level, the price faced huge bearish pressure as a result, and the stock plunged to the MA support. The uptrend was developing, but the selling pressure grabbed the trend and initiated an intermediate downtrend.

Graphic provided by:
With 50-day MA support, the stock formed a hammer single candlestick bullish reversal pattern; see the small box in Figure 1. The hammer candlestick hammered the existing downtrend and began a fresh upward rally. Here, we have to be watchful if GTIV can initiate the bullish rally and breach the gap-down resistance. Currently, very short-term long positions can be triggered with the target of $25 (resistance level). If the resistance is violated by the fresh rally, the demand pressure for the stock would increase. However, the relative strength index (RSI) (14) is showing lack of bullish strength. Therefore, traders have to wait for the indicator to surge above the 50 level to initiate long positions.

Graphic provided by:
On the monthly time frame in Figure 2, GTIV formed a top at 30 levels. Although a perfect double top was not formed, the price rally was restricted and struggled to sustain at the higher levels. Due to the top formation and the negative divergence of the RSI (14), GTIV plunged with the gap down, losing approximately $10. The gap down is prominently visible in Figure 2. The 50-day MA support prevented the stock from the serious damage. The ADX (14) highlights the possibility of consolidation in the narrow range of $19 and $25.

The gap-down resistance would be the toughest hurdle for GTIV.

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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