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An Island Reversal For Ann Taylor

10/19/07 08:40:01 AM
by Arthur Hill

Ann Taylor formed an island reversal, and the stock is on the verge of reversing a two-month uptrend.

Security:   ANN
Position:   Sell

Figure 1 shows Ann Taylor (ANN) with 60-minute candlesticks, and this short-term time frame captures the island reversal quite well. The stock gapped up on October 11, consolidated for two days, and then gapped down on October 15. The two gaps created an island and those who went long on this island are now trapped with losing positions.

FIGURE 1: ANN TAYLOR, HOURLY. ANN is shown here with 60-minute candlesticks, and the short-term time frame captures the island reversal.
Graphic provided by:
Graphic provided by: telechart 2007.
In addition to the island reversal, there is also a head & shoulders pattern taking shape. The stock consolidated in early October to form the left shoulder. The surge and decline last week formed the head. The consolidation over the last three days formed the right shoulder. A break below neckline support (green line) would signal a continuation lower and confirm the pattern.

FIGURE 2: ANN TAYLOR, HOURLY. Here are daily prices and the intermediate trend.
Graphic provided by: TeleChart 2007.
Figure 2 shows daily prices and captures the intermediate trend. ANN broken down in July and rallied back to broken support over the past two months. The advance formed a rising channel and the island reversal formed at resistance from broken support. The channel is still rising, but a move below the lower trendline would break the channel and call for further weakness.

The moving average convergence/divergence (MACD) is also shown on Figure 2, and this indicator started flattening in early September. The stock continued higher in October, but the MACD did not confirm and formed a negative divergence. The MACD remains in positive territory, and a move into negative territory would be bearish for momentum.

Arthur Hill

Arthur Hill is currently editor of, 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 and the main contributor to the ChartSchool.

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