The Gap Inc. (NYSE: GPS)

The Gap, Inc. operates as an apparel retail company. It offers apparel, accessories, and personal care products for men, women, children, and babies under the Gap, Old Navy, Banana Republic, Piperlime, Athleta, and Intermix brands. Its products include maternity apparel; loungewear, sleepwear, intimates, and active apparel for women; and handbags, shoes, jewelry, personal care products, and eyewear for men and women; women’s apparel, footwear, and accessories for sports and fitness activities, including crossover apparel and casualwear; and luxury and contemporary apparel and accessories. The company also has franchise agreements with unaffiliated franchisees to operate stores in Asia, Australia, Eastern Europe, Latin America, the Middle East, and Africa under the Gap and Banana Republic brands. The Gap, Inc. offers its products through company-operated stores, franchise stores, e-commerce sites, and catalogs.

The Gap’s stock has formed a head and shoulders (H&S) pattern. Please take a look at the 1-year chart of GPS (Gap, Inc) below with my added notations:

1-year chart of GPS (Gap, Inc)

Over the last (4) months GPS has created a very important support level at $40. That $40 support is also the current ‘neckline’ for GPS’ H&S pattern. Above the neckline you will notice the H&S pattern itself. Remember, patterns such as an H&S need to confirm to have the meaning they imply. Confirmation of the H&S would occur if the stock were to break below its $40 support. If GPS does break that level, the stock should move lower from there.

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The Tale of the Tape: GPS seems to have formed a head & shoulders pattern. Although a trader could go long at $40 expecting a bounce, the stock’s pattern implies an eventual breakdown. If that happens, a short trade should be entered on a break of the $40 level.

Before making any trading decision, decide which side of the trade you believe gives you the highest probability of success. Do you prefer the short side of the market, long side, or do you want to be in the market at all? If you haven’t thought about it, review the overall indices themselves. For example, take a look at the S&P 500. Is it trending higher or lower? Has it recently broken through a key resistance or support level? Making these decisions ahead of time will help you decide which side of the trade you believe gives you the best opportunities.

No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade. Capital preservation is always key!

Good luck!

Christian Tharp, CMT

Follow me on Twitter: @cmtstockcoach