Gap Needs a Few Closes Above $25 to Shine

 | Jul 14, 2017 | 9:35 AM EDT
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Gap Inc. (GPS) got an upgrade from a fundamental analyst. That is one leg of the "research stool", but let's look at the technical picture, too (and for a look at the wider retail sector, read Jim Cramer's article published earlier this morning).

Fundamental analysts can justify buying a stock that is in a downtrend, but that is typically not what a technical analyst would recommend.

Let's check out the charts and indicators on GPS.

In this daily bar chart of GPS, above, we can see that prices have made lower highs from November to May, but the lows around $22 have held until recently. Depending on your perspective or point of view, you could say that GPS has been in a 12-month downtrend or a sideways trading range.

Prices rallied sharply yesterday, but the slope of the 50-day moving average line is down and the 200-day line is flat. The On-Balance-Volume (OBV) line rose from last July until late April, suggesting that buyers of GPS have been more aggressive; unfortunately, it has not translated into a sustained uptrend.

The OBV line has weakened since late April, telling us that sellers of GPS have been more aggressive, with heavier volume being seen on down days. Momentum is showing a bullish divergence from May to July, and this might help extend the recent rebound.

In this weekly chart of GPS, above, we can see two distinct trends. A decline from 2014 into 2016, followed by a sideways trend. For the past year, GPS has traded above and below the flat 40-week moving average line. What is most interesting about this chart is that the weekly OBV line turned higher in early 2016 and recently made a new high for the move up.

The OBV line on this timeframe suggests that buyers of GPS have been accumulating shares for a long time. The trend-following Moving Average Convergence Divergence (MACD) oscillator is below the zero line, which is bearish, but the two lines that make up this indicator could be narrowing towards a cover shorts buy signal.

This Point and Figure chart of GPS, above, shows more of a downward bias than the bar charts above, in my opinion. A rally to $23.48 is needed to make a minor upside breakout, but there is potential chart resistance up to $25.

Bottom line: the fundamental upgrade of GPS will get people looking at GPS, and this may or may not translate into an uptrend. I am neutral until we close a few times above $25.

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