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The Gap and Patience

11/26/13 03:18:40 PM
by Koos van der Merwe

With the approach of Christmas, and the shopping that goes with it, is it worth buying shares of The GAP?

Security:   GPS
Position:   Sell

This was a news report that came out on November 22nd. "Gap Executive Reveals How Retailer Struck Gold With 'Game Changing' Reserve In Store Program." Will this new strategy increase sales over the coming Christmas buying period? Will profits increase? Should one start buying the share now, or is it too late?

Figure 1. Elliott Wave count suggesting weakness ahead.
Graphic provided by: AdvancedGET.
The chart in Figure 1 is a daily chart with an Elliott Wave count suggesting that the share price is in a new bull trend, with a WAVE I topping out on November 18th at $42.56. We all know that a WAVE I is followed by a WAVE II which can be as much as 100% retracement. With the lower end of the gap at $38.90 as shown on the chart, and knowing that a share price will always correct to fill the gap, and with the RSI and MACD indicator both suggesting weakness, the correction looks as though it will definitely happen. Does this correction present a buying opportunity?

Figure 2. Omnitrader chart showing buy signal on the Vote line.
Graphic provided by: Omnitrader..
The chart in Figure 2 is an Omnitrader chart showing where The GA gave me a buy signal on November 5th when the price was $37.54. The share price had 5 days previously bounced off the lower external band line which confirmed the strength in the buy signal. The price also broke through the Verve trailing stop, however it rose in a gap to the upper external band line, suggesting weakness ahead. The RSI 14 period has not yet given a sell signal, and neither has the TDIJak indicator, but weakness in the near future with the price falling to fill the gap can be expected. Finally, do note that the Red Green Long 6 Strategy has given a stop signal, suggesting a possible sell is on the cards.

I would not be a buyer of The GAP at present levels, but would wait for the share price to fall and fill the gap. The RSI indicator and TDIJak indicator should also confirm a buy. Patience is the name of the game.

Koos van der Merwe

Has been a technical analyst since 1969, and has worked as a futures and options trader with First Financial Futures in Johannesburg, South Africa.

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Vancouver, BC
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