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Tickers in this Article: WIT, DBRN, FDO, PFCB
While the stock market has bounced sharply higher over the past week, the intermediate trend is still technically heading lower. The 20- and 50-day moving averages for all the major averages are declining and the markets have been setting lower highs and lower lows. Because the market is still vulnerable to further downside, traders should be cautious of stocks that have set lower highs as they are showing weakness. In fact, many of these stocks may be setting up for new short selling opportunities. IN PICTURES: 7 Tools Of The Trade

Wipro (NYSE:WIT) has been in a trading range for several months, consistently finding support near the $11.50-$12 range. While it remains in a base, the rally attempt in June failed to travel to the top of the base showing weakness. This lower high may be foreshadowing future weakness. That high near $14 should be watched and if WIT ends up failing to reach that high on this bounce, it may end up falling through the bottom of the base. If it can clear this high, then it would negate the pattern of lower highs and lower lows and likely lead to further range-bound trading.

Source: StockCharts.com


P.F. Chang's China Bistro (Nasdaq:PFCB) is another stock that should be monitored after recently setting a lower high. In fact, PFCB also set a lower low and is struggling to get back into its prior base. This is a good example of how a lower high can clue a trader in to weakness ahead of the breakdown. The $42 level is a very important area to monitor as this level was acting as support until the recent breakdown. As such, it may hold a large group of previous buyers anxious to sell.

Source: StockCharts.com


Family Dollar Stores (NYSE:FDO) is another stock that recently undercut its base after setting a lower high. The base that FDO was building took on the shape of a head-and-shoulders top; the recent gap under the base is a very negative development. Many traders were caught off guard and FDO should remain vulnerable to sellers for the near future. The $38 level should be watched as the first level of possible resistance, but there will likely be sellers all the way through the $40 level. In fact, FDO may be setting up a shorting opportunity on a bounce into these levels. (For more, see Analyzing Chart Patterns: Head And Shoulders.)

Source: StockCharts.com


The Dress Barn (NasdaqGS:DBRN) is another stock that is looking weak. It has been in a steady pattern of lower highs and lower lows for several weeks. While it is pulling into a support level near $23, the current pattern doesn't look promising for longs. The first step long traders should look for is at least a halting of the existing pattern of lower lows. This would allow for a transition to a trading range which could end up forming a bottom. For now, the level to watch is near $23 to see if DBRN does indeed hold prior support levels.

Source: StockCharts.com


Bottom Line
While the recent bounce in the markets could lead to a bottom being formed near these levels, traders should be wary of stocks that have set lower highs and are in the process of bouncing back toward these levels. The odds of another down leg are still quite high if you consider that the major averages are still under declining moving averages and possibly becoming overbought on shorter time frames. Traders should remain cautious as it takes time for stocks to work through extended periods of weakness. This is why it is important to remain objective and pay attention to the patterns developing in the markets. Despite the sharpness of some of these rallies, stocks will need to reverse into patterns of higher highs and higher lows before the environment becomes conducive to trading the long side. For now, traders should continue to practice patience as the markets attempt to stabilize.

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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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