Each of these four stocks has a different topping pattern potentially in play. The similarity is that if they decline much further a lot more selling could be forthcoming. Strong uptrends prior to the topping patterns indicate there is potential for long plays too, if the short-trades don't materialize. Weakness over the last couple weeks in the major stock indexes means having a few potential short trades in the bag is a reasonable play. The overall trend is still up though, so if you trade these stock to the short side be sure the indexes are still weak (when the trade occurs) and that the short-trade price trigger has been hit.
SEE: How To Interpret Technical Analysis Price Patterns: Triple Tops And Bottoms
Domino's Pizza (NYSE:DPZ) has been a strong stock, and considering I ate their pizza last night I do think it is a good brand. My main concern is the leveling off the price since mid-July. On August 1 the price eclipsed a former high intraday but couldn't sustain buying pressure. Since then the stock has meandered lower. The price is still in an uptrend, and will remain so unless the price breaks below $58.50. A drop below $58.50--a major July swing low-- indicates further selling to ensue. If this scenario occurs the first target is $57, where I'd expect some buyers to step in. If the price continues to fall (likely after a brief rally) the next target is $52.There is also a long trade here too. If the price rallies above $63.50 I'd stick with the uptrend and try to exit between $66.50 and $67.50.
Eagle Materials (NYSE:EXP) was also strong up until May; since then the price has fallen about 14%. The trade here is to watch for a triangle pattern breakout. If the price drops below $64 look to go short with a stop near $68 and a target just above $50. Since it is a triangle, and a strong former uptrend, there is potential for a long play too. A rally above $68 breaks the triangle, but ideally I want to see the price break through $70. That initiates a long with a stop near $64 and a target at $82. The reason I like the short more is that there is a also a complex head-and-shoulders pattern. If the triangle breaks, the head and shoulders breaks too. But let's not count chickens before they hatch.
SEE: Continuation Patterns: Introduction To Triangles
Western Digital (NYSE:WDC) is currently within a small triangle after more than doubling price since late 2012. There is also a potential head and shoulders in this stock, albeit a rather lopsided on. If the price drops through $63 I think the price declines further over the next several weeks to months to the $55 region. The problem right now is that there isn't a great to place to put a stop; $69 is the logical spot but it is too much risk relative to reward for my liking. Another lower swing high (lower than $69) before a downside breakout would reduce that risk. On the other hand, if the price moves above $68 I'd play the trend with a stop at $63.50 and a target of $77.
Another stock which had a strong prior rally, but has stalled as of late is Hartford Financial Services (NYSE:HIG). The stock edged incrementally higher in June, just pushing beyond the May high, but couldn't hold it. Now the stock is approaching support and a supply level at $30. If the price falls much below $30 I believe the price will continue to decline in the coming weeks; target is $25.60. If the price rallies above the July high at $32.33 look for another wave in the uptrend. Targets are $34 and $35.25.
SEE: The Psychology Of Support And Resistance Zones
The Bottom Line
When markets weaken I like to have a few potential shorts trades in the back of my mind so if indexes stay weak I can take advantage. Fighting the dominant trend isn't wise though, so if taking a short position be sure both the stock price and major indexes are move lower and breaking below the price triggers. If the markets rebound, these stocks possibly will too, providing a long trade in alignment with the overall uptrend.
At the time of writing, Cory Mitchell did not own shares in any of the funds mentioned in this article.
Charts courtesy of StockCharts.com.