|With a large gap in June, Talbots (TLB) appeared to forge an important (bullish) breakout at 37. Volume expanded and the stock even managed to hold above 37 the rest of the month. However, this breakout was shot to pieces with an even bigger gap down on even higher volume. As a member of the retail group, a reversal this big could have ramifications for the group (retail), sector (consumer discretionary) and broader market.|
|Figure 1: Daily chart of Talbots.|
|Graphic provided by: MetaStock.|
|The two gaps created an area without any trades to form an island reversal (red box). All longs initiated within the box are now trapped within a losing position. As the pattern suggests, the outlook for TLB has changed markedly in the last few weeks. The bullish breakout (gap) argued for higher prices and the subsequent bearish reversal (gap) now argues for lower prices.|
Figure 2: Weekly chart of Talbots.
Taking a look at the weekly chart for perspective, the power of resistance around 40 becomes all too clear (red rectangle). Including the most recent high, the stock was turned back near this resistance zone at least five times (gray arrows). In addition, the advance from 20.59 to 39.82 retraced 50-62% of the prior decline (54.99 to 20.59) and looks like a bearish rising wedge. With the recent gap down on the daily chart and trendline break on the weekly chart (red arrow), the outlook for TLB is decidedly bearish with a test of the prior lows (in the area of 22) most likely.
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