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BREAKOUTS


Forest Laboratories And Its Bullish Breakout

06/22/11 01:15:43 PM
by Chaitali Mohile

After a long corrective period, Forest Laboratories is undergoing a bullish breakout.

Security:   FRX
Position:   N/A

In 2004, Forest Laboratories (FRX) initiated a bearish rally from $75. The bears grabbed the first drop in price, strengthening the selling pressure in FRX. The downward rally established support at $35, which later proved to be a robust support for the next three years. In Figure 1, we can see the horizontal support-resistance tool, extending strong support for almost six years. The stock witnessed many zigzag rallies with support at $35. Eventually, FRX breached the support in late 2008. Thereafter, the stock plunged to a new low below $20.

The average directional index (ADX)(14) had been very tricky throughout the rally. There was high selling as well as buying pressure throughout the bearish rally. The ADX line failed to stabilize above 20 levels, and therefore, the trend turned jittery. As a result, the price rally underwent highly volatile moves above $35. After breaching support at $35, the full stochastic (14,3,3) remained oversold for almost a year. The oscillator signaled a bullish reversal possibility for the stock.

FIGURE 1: FRX, MONTHLY
Graphic provided by: StockCharts.com.
 
According to Figure 1, FRX surged from the lowest point, forming higher lows. Gradually, the stock hit resistance at $35 (support-resistance line). The pullback rally formed an ascending triangle at the bottom of the price chart. The pattern is a bullish reversal formation, initiating a fresh bullish rally. Recently, the resistance level converted to a support level. The stochastic is highly overbought and the trend has not developed in a bullish or bearish direction. Therefore, the bullish breakout of FRX is likely to face difficulty in its upward journey. Since the buying pressure has improved, the bullish sentiments are likely to sustain during the breakout rally.

FIGURE 2: FRX, DAILY
Graphic provided by: StockCharts.com.
 
FRX has hit a 52-week high. The blue circle in Figure 2 shows the consolidated move of the stock. The various doji candlesticks formed during the sideways price action are indicating uncertainty and volatility in the stock. The full stochastic (14,3,3) is highly overbought and is ready to plunge. The uptrend in Figure 2 is overheated, signifying a trend reversal. However, an overheated uptrend can result in consolidation as well. Therefore, FRX would consolidate further and form a bullish flag & pennant pattern on the daily time chart. Although this bullish continuation pattern breaks upward, FRX must be watched carefully for the next few sessions.

Considering both charts, FRX is likely to stay volatile at this level. The extreme bullish conditions of the indicators would drag the price rally horizontally, and therefore, the current bullish breakout would turn sideways.



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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