The Gap, Inc (GPS) offers apparel and accessories for all members of the family under the brand stores including Old Navy, Gap and Banana Republic. The stock spiked higher on March 1 after the company reported better-than-expected earnings after the close on Feb. 28. This spike was short lived, as the stock reversed direction at the same time. From the high of $31.39 on March 1 to the 52-week low of $20.58 set on May 29, the stock crashed by 34%. This puts the stock below its monthly pivot at $22.62.

The Gap shares closed Wednesday, May 29, at $20.83, down 19.1% year to date and in bear market territory at 33.6% below that March 1 high. Fundamentally, the stock can be considered "too cheap to ignore" with a P/E ratio of 8.25 and a dividend yield of 4.54%, according to Macrotrends.

Analysts expect the Gap to post earnings per share of 32 cents when it reports results after the closing bell on Thursday, May 30. An important reason for share-price volatility is that the retailer is in the midst of its plan to spin off Old Navy and keep on closing underperforming Gap stores. Part of the problem is higher tariffs on clothing at the Gap. The restructuring plan has the Old Navy brand splitting away some time in 2020.

The daily chart for The Gap

Daily chart showing the share price performance of The Gap, Inc (GPS)
Refinitiv XENITH

The daily chart for Gap shows the spike higher on March 1, which proved to be a selling opportunity as strength was quickly reversed. The close of $25.76 on Dec. 31 was an important input to my proprietary analytics, and its semiannual value is below the chart at $12.67. The annual risky level is above the chart at $36.42. The close of $26.18 on March 29 was another input to my analytics, and the second quarter risky level is $32.63. The monthly pivot at $22.62 for May goes away at the end of the month.

The weekly chart for the Gap

Weekly chart showing the share price performance of The Gap, Inc (GPS)
Refinitiv XENITH

The weekly chart for the Gap is negative but oversold, with the stock below its five-week modified moving average of $23.57 and below its 200-week simple moving average, or "reversion to the mean," at $26.67. Note how the stock has been declining along its "reversion to the mean" since the week of Dec. 1, 2017, when the average was $31.29. The 12 x 3 x 3 weekly slow stochastic reading is projected to end the week at 10.55, down from 13.53 on May 24. If this reading falls below 10.00, the stock becomes "too cheap to ignore."

Trading strategy: Buy Gap shares on weakness to the semiannual value level at $12.67 and reduce holdings on strength to the 200-day simple moving average at $26.45.

How to use my value levels and risky levels: Value levels and risky levels are based upon the last nine weekly, monthly, quarterly, semiannual and annual closes. The first set of levels was based upon the closes on Dec. 31. The original semiannual and annual levels remain in play. The weekly level changes each week; the monthly level was changed at the end of January, February, March and April. The quarterly level was changed at the end of March.

My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in. To capture share price volatility, investors should buy shares on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before their time horizon expires.

How to use 12 x 3 x 3 weekly slow stochastic readings: My choice of using 12 x 3 x 3 weekly slow stochastic readings was based upon backtesting many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.

The stochastic reading covers the last 12 weeks of highs, lows and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading, and I found that the slow reading worked the best.

The stochastic reading scales between 00.00 and 100.00, with readings above 80.00 considered overbought and readings below 20.00 considered oversold. Recently, I noted that stocks tend to peak and decline 10% to 20% and more shortly after a reading rises above 90.00, so I call that an "inflating parabolic bubble," as a bubble always pops. I also refer to a reading below 10.00 as "too cheap to ignore."

Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.