SHOO In Narrowing Range

11/30/10 12:22:39 PM

by Chaitali Mohile

The price rally of Steven Madden Ltd. is likely to slow down above an intermediate high resistance.

Security: SHOO
Position: N/A

After hitting a new intermediate high at $44, Steven Madden Ltd. (SHOO) plunged a few points. During the descent, SHOO witnessed a gap down near 41.97 and 41 levels. Due to the gap down, the stock could retrace toward the 50-day moving average (MA) support. We can see many small doji candlesticks with the support of the 50-day MA in Figure 1. The doji highlighted the volatility while establishing support. Gradually, the stock initiated a fresh pullback rally towards the previous high resistance near $44. The gap was filled by the price rally, creating another strong support for price action. A developed uptrend that was reversed due to the downside rally of SHOO once again popped up in Figure 1. The average directional index (ADX) (14) surged above 20 with buying pressure indicated by the positive directional index (+DI), reflecting the developing uptrend (see the blue rectangle).

FIGURE 1: SHOO, DAILY

Graphic provided by: StockCharts.com.

Gradually, SHOO moved higher with marginal increase in bullish strength but the upper shadow of all the candlesticks showed reluctance for moving towards resistance. The strength was diminishing as the stock was nearing the previous high resistance. Price violated the resistance and made an intermediate new high.

However, the relative strength index (RSI)(14) paused near the 70 level and is hesitant to breach the resistance level. This indicates a lack of confidence in the rally. The two doji candlesticks formed near $44 confirm the weakness in the rally.

FIGURE 2: SHOO, WEEKLY. The two converging trendlineS show the narrowing range of the stock.

Graphic provided by: StockCharts.com.

A rising wedge -- a bearish reversal pattern -- is formed on the weekly time frame in Figure 2. Though SHOO steadily formed higher lows and higher highs, the narrowing range formed the rising pattern. The upper and the lower trendline are converging, indicating the possibility of a bearish breakout. It is likely that SHOO would continue to move in the narrow range till price actually breaks down. The negative divergence of the RSI (14) confirms the bearish breakout and volatility in the current scenario. An overheated uptrend has turned weaker in Figure 2. Therefore, the narrow trading range could turn volatile before breaking downward.

To conclude, the bullish rally of SHOO would slow down above the freshly formed support and could initiate a bearish rally in the future.

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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TECHNICAL ANALYSIS

SHOO In Narrowing Range

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