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FLAGS AND PENNANTS


Schering Plough Holds Gap

05/05/06 08:16:56 AM
by Arthur Hill

Schering Plough formed a bull flag after a big gap, and this points to higher prices ahead.

Security:   SGP
Position:   Accumulate

For the second time in as many months, Schering Plough (SGP) gapped higher on big volume (Figure 1). The first gap occurred in March and there were two high volume advances that month (blue ovals). The stock pulled back and filled the gap, but the March low held without a problem. The second big gap occurred in April and this gap is holding. There has been some post-gap selling pressure, but this gap has yet to be filled and remains bullish. In addition, note that high volume accompanied this gap (gray ovals).

FIGURE 1: SCHERING PLOUGH. For the second time in as many months, SGP gapped higher on big volume.
Graphic provided by: MetaStock.
Graphic provided by: MS QuoteCenter.
 
SGP has consolidated since the April gap and formed a bull flag. After an advance, a bull flag slopes downward and represents a mild correction. After a decline, a bear flag slopes up and represents a mild rally. The bull flag is confirmed with a breakout that should include a volume expansion. For this stock, a move above the upper trendline and last week's high (19.6) would confirm the current flag and point to an even more significant breakout at 19.9.

The stock has started to firm over the last few days and merits a close watch. After a long black candlestick on May 1, the stock consolidated for three days with three indecisive candlesticks; note the small bodies (open/close) and long upper/lower shadows (high/low). A move above the high of the long black candlestick would turn this indecision into bullish decision and also confirm the bull flag.



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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