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GAPS


Mind The Gaps In Centex

06/24/05 08:31:45 AM
by Arthur Hill

Centex, a leading home building stock, recently gapped higher on big volume, and this gap is close to becoming an exhaustion gap.

Security:   CTX
Position:   Hold

Centex is no stranger to gaps. The stock gapped above falling wedge resistance in mid-May and surged to new highs in June. This gap was a clear breakaway gap and was never in danger of being filled. A gap higher should be considered bullish as long as it remains unfilled. Also note that volume expanded and buying pressure kept the stock comfortably above 60 in the days following the gap.

Once an advance is under way, two types of gaps can form: common or gaps. Common gaps signal a continuation of the uptrend and should be considered bullish as long as they remain unfilled. Exhaustion gaps, on the other hand, signal a buying climax that results in a reversal. However, this gap must be filled to qualify as an exhaustion gap (Figure 1).

Figure 1: Centex. Breakaway gap and exhaustion gap?
Graphic provided by: MetaStock.
Graphic provided by: Reuters Data.
 
Centex has an exhaustion gap working, but I am not ready to call for a sharp reversal. The stock gapped above 70 with the highest volume since late April and formed a shooting star (red oval). These are bearish candlestick reversals that require confirmation. The long upper shadow (intraday high) shows an intraday failure by the bulls. The failure extended with a decline over the next three days.

The gap is technically filled, but the stock is trading right at trendline support and above the June 16th low, which is marked by a white candlestick before the gap. In my book, it would take a move below this low (67.55) to signal an exhaustion gap and mark a short-term trend reversal.



Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

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