JDA Software (JDAS) an Interesting Gap Retracement Play

07/31/2009 12:01 am EST


Anyone who has been following the recovery in the US equity market has probably noticed that the entire technology sector has been on a northbound rampage, with no sign of letup evident…yet. Let's examine one of the high-fliers in the software industry group, JDA Software (JDAS).

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FIGURE 1: JDAS, DAILY. Attractive earnings growth rates are certainly one of the prime catalysts driving JDAS higher. Bullish technicals are also evident, possibly allowing a post-retracement long entry in the days ahead.

Figure 1, the daily chart of JDAS, is a real beauty, especially for those traders who enjoy latching onto super-high relative strength stocks from strong industry groups that have recently gapped higher. Normally, when a stock gaps significantly higher like this, there is a strong fundamental reason underlying such a move, and in this case, JDAS's projected earnings trend (anticipated to rise steadily through the fourth quarter of 2010) is the primary catalyst.

Of course, now that the broad market has stalled (for the time being), JDAS has also begun to retrace and/or consolidate a portion of its recent gap-fueled run up. Wise traders will wait for at least two technical conditions before attempting to board this stock on the long side: First, wait for the broad markets (Standard & Poor's 500, NASDAQ 100, and/or Russell 2000 indexes) to pull back and find support and then give confirmation of trend continuation; and second, watch for JDAS to find support somewhere within the range of the gap before giving a fresh long buy signal. For newer traders, one of the easiest entry triggers to use is the stochRSI (10) indicator. It tends to work well when a high relative strength stock begins to come out of a retracement move, especially when the broad markets are also cranking higher. The stochRSI tends to provide fewer whipsaw signals than a similarly tuned commodity channel index (CCI) (10) or relative strength index (RSI)(10) and also is very useful in helping to identify the underlying price cycles in a given stock or commodity.

As far as the basic technicals on the chart are concerned, there are many positive signs that JDAS may still have more room to run on the upside. First off, note the mammoth long-term money flow uptrend, as depicted by the Chaikin money flow indicator (CMF) (100) at the bottom of the chart. Big money has been—and still appears to be—in love with this tech sector rocket, no doubt because of major interest in the company's projected earnings growth rate. Next, note the strong uptrend line (red line) and the series of higher highs and higher lows. It's also interesting to see how the gap was launched from the misshapen cup-and-handle pattern that took seven weeks to play out. And play out it did, with the stock lurching higher by more than 25% in one session (from the July 20th close to the July 21st open). Finally, the stock has found temporary support near the last major high (August 2008). It would not be surprising to see JDAS dip further into the open gap area, however.

When a stock gaps significantly higher or lower, it pays to check the fundamentals of the stock in addition to the technicals. Stocks with solid earnings trends and/or positive earnings surprises appear to have a definite edge, especially when the technicals (trend, momentum, cycles, and money flow) are in agreement with the fundamentals. In this case, JDAS seems to be a stock worth considering for a potential long entry, as the fundamentals and technicals appear to be outstanding.

By Donald W. Pendergast, Jr. of Chartw59.com


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