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SHAKE-OUTS


Apache Corp. Offers a Good Example of a Shakeout Pattern

10/02/02 10:23:41 AM
by Kevin Hopson

Apache Corp. (APA) broke a significant top in the $57.00 to $58.00 range last month. The positive relative strength and shakeout pattern indicated a further move to the upside.

Security:   APA
Position:   Hold

Apache Corp. (APA), an oil and natural gas exploration and production company, has significantly outperformed the market over the last year. While the Dow, S&P 500 and Nasdaq all took out their September 2001 lows back in July, Apache Corp. did not even come close. More specifically, Apache bottomed out in the $45.00 to $46.00 range back in July, much higher than its September 2001 low around $35.00/share.

Additionally, in recent days Apache has been making a run at its 52-week high ($60.09), while the major indices have proceeded to test and/or break recent lows. As a result, Apache is an excellent example of the type of company to look for in a bear market. They have had a couple of significant technical developments over the past few weeks that signaled a potential move higher.

Graphic provided by: Stochcharts.com.
 
First, there was a shakeout pattern in early September. To elaborate, a shakeout pattern develops when a stock fails to significantly break a prior top and then proceeds to give a short-term sell signal. What differentiates a shakeout pattern from other double top formations are the following:

1) The stock is in a clear uptrend and is trading above its trendline,

2) The long-term relative strength is positive and

3) The stock has not given a sell signal prior to the shakeout.

By looking for these technical characteristics, investors can identify a shakeout pattern and be more confident that prices will reverse back up. For example, if you look at the chart on Apache, you will see that the stock formed a double top in the $57.00 to $58.00 range during the month of August. This came after the July lows so the stock was in a clear uptrend.

In addition, Apache did not give a sell signal (breach a prior low) until the stock broke support in the $53.00 to $54.00 range early last month. This completed the shakeout pattern. Coincidentally, Apache's long-term relative strength gave a buy signal on September 16, confirming the potential move up. As you can see, the stock found support along its 200-day moving average (down around the $52.00 level) and proceeded to break a significant top in the $57.00 to $58.00 range, eventually making its way up to the $60.00 level.



Kevin Hopson

Kevin has been a technical analyst for roughly 10 years now. Previously, Kevin owned his own business and acted as a registered investment advisor, specializing in energy. He was also a freelance oil analyst for Orient Trading Co., a commodity futures trading firm in Japan. Kevin is currently a freelance writer.

Glen Allen, VA
E-mail address: hopson_1@yahoo.com

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Date: 10/23/02Rank: 5Comment: I ve encountered this pattern before so am familiar with it but have never been able to quantify as well as you. Thanks
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