While the S&P 500 remains in an overall uptrend, and one shouldn't fight the trend, not all stocks move in the same fashion. These four stocks have seen a sharp decline, and have recently consolidated, with the breakout likely to be to the downside. While current momentum is down it's possible the breakout could be back to upside; therefore, here's the strategy for trading either case.
Halliburton (NYSE:HAL) sold off more than 10% between mid-November and mid-December, and has been consolidating since. Based on the price slide late in 2013 the expectation is the price will continue lower. Short positions can be taken between $51 and $51.60--if given the opportunity--with a stop above $52. Alternatively, a drop below $48.70 is the breakout trade, with a target at $44. Upside breakouts should be treated with caution, but a move back above $52 indicates buying could push the price back into the $54 region.
Peabody Energy (NYSE:BTU) is in a long-term downtrend, and after rallying through the last half of 2013, the stock looks poised for another another pop lower. A drop below $17.50 breaks the rising consolidation, and sets a target in place of $16.75 followed by $15.90 if the price continues to drop beyond the first target. A stop can be placed above $18.25. Based on the rally since July 2013, this could be a short-term correction lower in what's now an uptrend, or the downtrend could be continuing. If the downtrend continues, downside targets can be moved below $14.30. While there is the possibility of a break higher, at this time, long trades aren't compelling until the price shows some renewed bullish characteristics.
Apache (NYSE:APA) rallied to nearly $95 in November, a level that aggressively rejected buyers back in September of 2012 as well. The pullback from $95 has placed momentum to the downside, and now the price has held within a complex consolidation for a month. The consolidation has had several false breakouts so far, frustrating traders and resulting in whip-saw price action over the last several trading sessions. While it's taking it's time, immediate momentum also appears to be down, signaling a target of $82.25 followed by $78.50. Entry points include a drop below $83.75, although given a number of a false breakout the short can be picked up nearly anywhere in the $4 consolidation. Places for stops include $86.50 to $86.75 and just above $88. A definitive breakout above $88 indicates a potential advance to $92.
Chicos FAS (NYSE:CHS) has tried to climb above $20 for the past year and a half, but was rejected once again at the start of 2014. Currently, the decline has slowed, but is still underway. Strong selling is likely to be rekindled, potentially with a drop below $17.35. A stop loss can be placed just below $18. The downside target is $16.75, with potential for a lower price given that longer-term range support doesn't come in until $16 to $15.25. At this time, bulls don't have much to celebrate, unless the price can get above $20.
The Bottom Line
After a strong move, consolidations provide an opportunity to get in in the direction of overall momentum. Traders can choose between trading the breakout, or entering during the consolidation and anticipating the breakout direction based on momentum. Both have advantages and disadvantages, which each trader must weigh based on their risk tolerance and analysis. Stops should be used to control risk, and targets can help establish whether a trade warrants the risk.
Disclosure - At the time of writing, the author did not own shares of any company mentioned in this article.