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Tickers in this Article: DLLR, EBAY, VZ, AMT
The recent correction in the markets has caused a lot of damage to many stocks. In fact, many stocks are starting to break down from consolidations threatening to emerge into downtrends. Consolidations are important for a stock, as they allow shares to transfer hands, shaking out weaker hands so that stronger hands can accumulate their positions. However, when a stock breaks down from a base, it means everyone who was accumulating in that base is now underwater. This has important implications, because the base may have simply been an area where institutions were distributing stock to retail traders. While many will look for a reason as to why a stock is sliding under a base, the bottom line is that there was simply more sellers than buyers.

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Dollar Financial Corp. (Nasdaq:DLLR) is an example of a stock that was in a healthy base after a good rally in autumn of 2009. It attempted to break out in April, but quickly fell back into the base. It has failed to stabilize on its bounce attempts, and recently broke under the entire base. This breakdown was accompanied by an increase in volume, and currently, anyone accumulating shares over the past few months is now showing a probable loss. When a stock breaks down like this, it often takes a long time for it to repair the damage, as investors who are underwater attempt to get out on any bounces. In the short term, the level to watch would be the bottom of the prior base near $21 to see if sellers step in.

Source: StockCharts.com


eBay Inc. (Nasdaq:EBAY) is an example of another stock that attempted a breakout only to reverse course and break down under the entire base. EBAY had been in a consolidation through the end of 2009 and into early 2010 before attempting a break out in March. EBAY rallied sharply and started to consolidate in a healthy manner. However, it dropped sharply when the markets started showing weakness following the breakout. It then continued to slide, falling under the entire base. Currently, not only are EBAY holders faced with losing their recent profits, but they are also looking at a possible continuation move lower.

Source: StockCharts.com


Verizon Communications Inc. (NYSE:VZ) has been trading in a wide range over the past several months while consistently finding support near $28. It quickly found buyers after it dropped to this level during the flash crash, but a few days later it fell under $28 and failed to bounce back. It has been struggling under this level, and is beneath a large base that could weigh on it moving forward. The $28 level remains the key level to watch, and a failure to reclaim it could lead to more selling that would drive VZ to new lows.

Source: StockCharts.com


American Tower Corporation (NYSE:AMT) is showing a little different pattern in that the price level it broke down from was not horizontal. AMT was trading in an ascending triangle base, consistently printing higher lows as it consolidated. It was finding sellers near $45, but otherwise looked healthy. However, there was a change in character in April, as AMT fell under its 50-day moving average on high volume. It has since been unable to clear this average, and has seen several high-volume down days. It fell under the trendline marking the recent lows, and is currently under the majority of its recent base. An important level to watch would be the recent high near $42. A move above this level would probably mean a continuation of a consolidation. A failure near current levels may confirm a top in the stock.

Source: StockCharts.com


Bottom Line
While it's possible that the markets could end their correction near current levels, the stocks above have been significantly damaged. It will take some time to heal the damage, and in fact, these stocks could still see much lower prices. The key for each of these will be to watch the price action as it tests the lower ranges of the prior bases. A failure there would mean that there are still sellers looking to get out near those levels, and they may start looking to get out at any change they get if the stock reverses. If buyers are able to overwhelm the first level of sellers, it would at least create a new level of support on which traders can base their decisions. It's still too early to tell which scenario will apply, but the path of least resistance is likely lower for now.

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At the time of writing, Joey Fundora did not own shares in any of the companies mentioned in this article.

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