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Ford Motor Exhaustion Gap Warns Of Decline

01/17/13 07:51:46 AM
by Donald W. Pendergast, Jr.

Ford Motor shares have enjoyed a strong rally since summer 2012, but its new exhaustion gap pattern is warning of a possible reversal soon.

Security:   F
Position:   N/A

Strength begets strength, it would seem, especially in the case of heavily traded large-cap stocks with huge institutional followings. In the case of Ford Motor Co. shares (F), all it takes is one look at its daily chart price action since last summer to realize that a substantial uptrend is in place -- one that has actually been accelerating higher over the past four weeks.

To some investors, particularly those who recently bought in to the already mature trend, it may seem as if the stock might be able to go much higher. But to skilled technicians and savvy traders, the signs are already in place that this particular rally is much closer to its end than it is to its beginning. Here's a closer look now (Figures 1 and 2).

FIGURE 1: F, DAILY. Any time that an exhaustion gap prints at the same time of ultrahigh 14-period RSI readings and waning long-term money flows, the odds for a sharp pullback or trend reversal are greatly increased.
Graphic provided by: TradeStation.
Every once in a while, one of those textbook-quality chart pattern examples will appear as you scan through your list of trading/investing candidate stocks. As you pore over the various technicals on the chart, it almost seems as if the pattern or technical dynamic spread out before you is almost too good to be true. That's pretty much what we see here on Ford's daily graph:

1. A major multicycle low was in place as of August 2, 2012.
2.Five weeks later, the stock printed a breakaway gap (a dirty gap, but still valid in the overall context of a major move) on September 6, 2012.
3. The first major trendline was established at that point.
4. The stock staged a powerful bullish continuation gap on October 13, 2012, with the long-term uptrend line remaining intact ever since.
5. The trend accelerated higher in mid- to late December 2012, beginning a near-parabolic rise as latecomers piled into the stock, fearful of missing out on more gains.
6. Finally, on January 10, 2013, the stock staged a very obvious exhaustion gap, presumably as the last of the "late to the party" investors bought in -- from other traders and investors who could already smell a possible bearish reversal in the wind.

The series of events described here don't always play out as perfectly as what you see here, but after looking at tens of thousands of price charts since 1979, my take on typical outcome for this kind of an exhausting trending pattern is this:

1. The odds of a 5% to 10% correction within the following two weeks is extremely high.
2. Those who buy in near the top after an exhaustion gap (other than short-term scalpers and daytraders) usually get caught on the wrong side of the market and typically will lose money by the time they realize the reversal is already under way.

FIGURE 2: FORD MOTOR VS. SPX. Ford Motor shares (F) are far outperforming the .SPX over the past four-, 13-, and 26-week periods. Note the ultra-high RSI reading, however.
Graphic provided by: TradeStation.
Graphic provided by: TradeStation Radar Screen.
Other technicals are confirming a likely pullback/reversal in shares of Ford; the 14-day relative strength index (RSI) recently exceeded 85 on a closing basis, and that is also a high-probability warning for a near-term decline. In addition, the 100-day Chaikin money flow (CMF)(100) histogram has also failed to make a new high, indicating that the smart money has already been scaling out of their long positions in the stock.

Anyone who is currently long shares of Ford should already be running a fairly close trailing stop and/or considering a possible near-term put protection or scale-out/profit-taking strategy. Speculative traders might want to prepare for a possible decline by looking to buy puts on a decline below 13.68 (Thursday's low), holding them for a potential ride down toward the 13.00/13.20 area, which is Ford's first strong support level (pink shaded rectangle).

Ford shares may eventually try for an assault on the 14.22 area. If the stock can exceed 13.94 after its anticipated pullback, that could be a powerful short-term bullish momentum play to consider as well. Trade wisely until we meet here again.

Donald W. Pendergast, Jr.

Freelance financial markets writer and online publisher of the S&P 500 Weekly Forecast service.

Title: Market consultant and writer
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