0 BRL Gaps
Q: Thanks for book, the seminars, and the podcasts — they’re really helping. It’s Aug. 7 2008, and I’m looking at BRL. It’s hit a new 52-week high and it looks as if it’s near or slightly above resistance from three years ago. But on the daily chart you can see huge gaps up that occurred on the 17th and 18th of July. Since then it’s been a steady, shallow uptrend. Should those huge gaps make me cautious? Do they have any implications for the steadiness of the current uptrend? I’ve been staying away from stocks with graphs like this because I don’t know what to make of the gaps. - Kate C.
A: Hi Kate – you’re right to be a bit more cautious about gaps since they tell a different story than a slow and steady trend. In the case of BRL, there are two types of gaps in the recent chart. On May 8th, the stock gapped down on an earnings report. Many times, an earnings gap or trading gap will eventually return to fill the gap. Notice how the $50 price is the support prior to the gap and also on the next gap up on July 17th. The second, and currently more relevant, gap is the one which occurred on July 18th. This was the result of the acquisition announcement where Teva will acquire Barr at approximately $66.50/sh. Notice how BRL is now running flat around the $66.50 level. It hardly moved even after yesterday’s earnings. This is when you bypass the technicals – overhead resistance, trends, gaps – and recognize that BRL is driven primarily by acquisition news. If the Teva deal falls through, BRL will likely collapse to pre-news levels and lower. If it goes through as planned, the stock should not stray far from it’s current price – hardly a trader’s dream.
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