Filed Under:
Tickers in this Article: GMCR, CODI, SAPE, AMEX:DNN
"It was the best of times; it was the worst of times," begins the famous Charles Dickens novel "A Tale of Two Cities". The book tells the story of two men who look similar, but are very different.

7 Tools Of The Trade

So how does this relate to trading you ask? Here we look at four stocks that just recently were all emerging from similar bases. But, as you might have guessed, they haven't all followed the same path since then: only two have begun to head higher, while the other two have fallen under the base. Often when the markets begin to consolidate, market participants will receive mixed signals, turning the market into a stock picker's market. We may be entering this type of period now. As a result, we are starting to see both long and short setups forming.

In a "best of times" chart, Green Mountain Coffee Roasters (Nasdaq:GMCR) recently emerged from a wide base in a very decisive gap higher following earnings. It followed through over 10 points higher before finally showing some weakness. It is beginning to pull back toward the breakout area and could be offering a second opportunity for traders that missed the initial breakout. Traders should keep an eye on GMCR as it tests the $37.50-$40 level in the coming days to see if buyers step in, or if it's headed back to fill its gap just under that level. (For more, see The Anatomy Of Trading Breakouts.)


In a "worst of times" chart we will take a look at Compass Diversified Holdings (NYSE:CODI). CODI was forming a very similar base to GMCR, and in fact began to clear its base early in 2011. However, CODI was never able to follow through and recently sliced through the bottom of the base on high volume. It is now retesting the base from the opposite side of GMCR and could find sellers waiting near $16.50.


Another stock that looks like it may be in trouble is Sapient Corporation (Nasdaq:SAPE). It also had been building a base for several months before recently falling under it. SAPE has been finding support just under $12 until its recent slide toward $11.50. It quickly bounced back from this level and is at a critical point. If it fails here it could confirm a large top is in place, leading to lower prices. However, if it can reclaim its base, it could trap some bears and head back toward the top of its range.


We will end with a "best of times chart" in Denison Mines (AMEX:DNN). DNN rallied sharply in the latter half of 2010 and began to consolidate last December. It emerged from a small base in February and is now beginning to test the breakout area near $3.50. It appears to have bounced from this level and could soon resume its breakout. Traders should continue to monitor the $3.50 area for support if DNN lacks follow-through.


The Bottom Line
The current market has the potential for more lateral movement. As such traders should see a more fractured environment. While at the surface many bases look similar, traders should monitor how the stock behaves at the fringe areas of the chart. If a stock slips under a support level and enough traders go under water, it could cause the entire base to act as resistance. If the stock emerges higher from the base, it could very well mean the opposite. While the title "A Tale of Two Charts" is simply a play on words, the fact is that traders may be in for a time period where both types of setups will begin to emerge equally.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

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

comments powered by Disqus
Trading Center