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FLAGS AND PENNANTS


FEIC Resuming Bullish Rally

01/26/12 08:49:31 AM
by Chaitali Mohile

The technical indicators are likely to add negative pressure on the breakout journey of FEIC.

Security:   FEIC
Position:   Buy

FEICO (FEIC) has been consolidating for the past two months. The stock formed a bullish flag & pennant on the daily time frame chart in Figure 1. A bullish rally initiated in October 2011 and breached the 50-day as well as the 200-day moving average (MA) resistance. Thereafter, the stock surged to $42, making a profit of about 14 points in just one month. The rally was followed by a short-term consolidation phase, forming a bullish continuation pattern -- a flag & pennant. The ascending 50-day MA extended support to the lower trading range of a sideways price rally.

During the consolidated move, the relative strength index (RSI) (14) was ranging between the 70 and 50 levels. A developing uptrend failed to surge above 30 levels, resulting in a weak price rally. Due to the lack of confidence, the bullish indicators could not drag the price rally upward.

After a bullish breakout of the flag & pennant, FEIC has surged to a new high at 44.56 levels. The breakout journey of FEIC is filled with small candles and many doji candlesticks, indicating uncertainty. The RSI (14) is suppressed by the 70 level, suggesting a lack of bullish strength in the price action. The average directional index (ADX) (14) is fluctuating in the developing trend region between the 20 and 30 levels.

FIGURE 1: FEIC DAILY
Graphic provided by: StockCharts.com.
 
Due to the weak bullish pressure, the breakout journey is likely to proceed slowly. A potential target of FEIC would be 42 - 27 = 15 (size of flagpole) + 42 (breakout level) = 57. However, traders have to wait for the strong and stable bullish rally.

The weekly chart in Figure 2 shows resistance at 42.5 levels. In June 2011, FEIC plunged from 42.5 due to a lower high formed by the RSI (14) and a highly overheated uptrend. In addition, during the pullback rally the RSI continued to form a series of lower highs. The stock formed three white soldiers -- a bullish reversal candlestick pattern with the support of 50-day MA. We can see that a fresh uptrend was developed by the average directional index (ADX)(14) in Figure 2. However, the previous high resistance at 42.5 restricted the rally. As a result, the stock moved sideways under the same resistance and the bullish flag & pennant is formed on the weekly time frame as well. The bullish continuation pattern has appeared on both charts, making it more reliable.

FIGURE 2: FEIC, WEEKLY
Graphic provided by: StockCharts.com.
 
The breakout point of FEIC would be a best buying opportunity for the long-term traders as well as investors. Currently, the RSI (14) is showing negative divergence toward the breakout rally. In this scenario, it would be difficult for the stock to convert the previous high resistance to support. FEIC would turn volatile while establishing a new support.

In Figure 2, FEIC has breached the resistance (red dotted line) and is likely to sustain at the fresh support. The negative divergence can decelerate the breakout rally. If the stock sustains above the 42.5 support, traders can trigger a long position with the target of $57.

To conclude, the breakout rally of FEIC could be delayed till the indicators accumulate bullish strength.




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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