Tickers in this Article: SPY, IBM, ITW, LYB, PXD
In last week's market summary I pointed out that $129.42 was my final support in the S&P 500 SPDR (ARCA:SPY) and as long as the price of the ETF stays above that level, recent market declines can be considered corrections within the uptrend. That level has not yet been penetrated, but the possibility of a major decline exists should that level be breached. In that light, there are opportunities in down markets should the markets continue to decline. A double top is a topping formation that is created by two price peaks nearing a similar price with a retracement in between. If after the second peak the price retreats below the retracement level the double top is considered complete, and it's a bearish signal. The appearance of a double top provides a potential short sale trade, and also acts as a warning to the longs. These four stocks recently completed double tops and have significant price levels in play that both longs and shorts should be aware of.

SEE: Trading Double Tops and Double Bottoms

International Business Machines (NYSE:IBM) recently completed a double top when it dropped below the $196.79 level. The break below this support level was preceded by two peaks, the first on April 3 at $210.69 (52-week high) and second peak on May 1 at $208.93. The peak extremes vary slightly, not culminating at the same price level, but overall the formation appears valid. The downside target based on the formation is $182.89. Resistance is likely to come in between $197.50 and $200. A significant rise back toward the recent high at $208.93 negates the pattern.

SEE: Support & Resistance Basics

Illinois Tool Works (NYSE:ITW) recently completed a more classic double top pattern with the two peaks reaching almost the exact same level. March 19 was the first peak at $58.24 followed by the April 27 peak at $58.27. The recent decline below support at $54.37 (the retracement low of the pattern) signaled potentially bearish implications for the stock. The downside target for the double top chart pattern is $50.47. The pattern is negated if the stock moves back toward the March and April peaks. Minor resistance is at $55 to $55.30.

SEE: Retracement Or Reversal: Know The Difference

LyondellBasell Industries (NYSE:LYB) completed its double top near the beginning of May, but a strong upside move on May 21 has brought the stock back to the breakout point. The pattern was created by two peaks in February and April of $46.39 and $46.13 respectively. The breakout point, or low of the formation, was $38.91. Since the original downside breakout on May 8 the stock has been moving choppily lower. The ultimate downside target based on the pattern is $31.43. Resistance is likely to be significant between $40 and $41 on any moves higher.

Pioneer Natural Resources (NYSE:PXD) is also trading near the double top downside breakout point after a strong move higher on May 21. The first top in this stock appeared in mid-February at $119.19 (52-week high) and was followed by another peak in early May at $117.63. While there is a difference between the two highs, $118 is the main resistance point for the pattern as it was tested multiple times. Recently the stock broke below the low of the pattern at $99.82 signaling a decline to $81.64. Resistance is at $102.50 and $107.50.

SEE:The Anatomy Of Trading Breakouts

The Bottom Line
The market has yet to give clear technical confirmation (at least for me) that this is a full fledged decline. Currently it remains a correction, but even so, some stocks are creating topping patterns that provide shorting opportunities or can serve as a warning to the bulls in those stocks. A rally back to the breakout point is common in these patterns, but an aggressive move higher toward the prior peaks is not - such a move negates the pattern. The market is flirting with entering a major decline, which means that having some trade ideas on both sides of the market (and strict risk controls) is a good idea depending on how the next several days play out.

Charts courtesy of stockcharts.com

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

comments powered by Disqus
Trading Center