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Tickers in this Article: LULU, SNDK, USB, DAL
Although the markets have been rebounding pretty sharply off the recent lows, there are still many charts that remain vulnerable to further downside. Many stocks that were attempting to build a base broke down and have been struggling to gain traction. While a consolidation is typically healthy, it can weigh on a stock when it breaks down from it. When a stock breaks down from a base, it means everyone who was accumulating in that base goes under water. This has important implications, because it's human nature to try to regain losses as quickly as possible. This is why a base will often act as stiff resistance when broken, and at this point, traders are taking any bounce as an opportunity to get out as close to breakeven as possible. IN PICTURES: 7 Tools Of The Trade

Lululemon Athletica
(Nasdaq:LULU) is an example of a stock that is struggling under a prior base. LULU had been working on a base from April through August, slicing through the bottom on an increase in volume. The increase in volume at the base was a warning sign that institutions were dumping stock. Typically, a decline in volume as the stock consolidates is preferable. LULU is currently testing the $35.50 level, which previously acted as support; this will be the first area to watch for sellers. A failure in this area could lead to new lows.

Source: StockCharts.com


SanDisk Corporation (Nasdaq:SNDK) has an eerily similar chart to LULU. It was consolidating nicely after a strong rally until the bottom fell out in August. SNDK also had high volume throughout the base and saw an increase on the breakdown. It has also failed to climb back above resistance, despite the recent bounce in the general markets. These are all warning signs, and SNDK remains in a vulnerable position here. The $40 level is a clear level to watch moving forward, as this was where SNDK broke down. There is an unfilled gap in this area and it could act as very stiff resistance. (For more insight, see Support And Resistance Reversals.)

Source: StockCharts.com


U.S. Bancorp (NYSE:USB) is an example of a stock that was showing weakness before entering a small consolidation. When USB broke under the small consolidation in August, it came as no surprise: USB had been struggling to get back above its 200-day moving average and failed to reclaim most of the preceding drop. USB has bounced pretty sharply the past few days and should be watched in this area. If USB can somehow stabilize here, it could set up a scenario where some shorts would be forced to cover. However, the more likely scenario is for USB to struggle in this area and resume heading lower.

Source: StockCharts.com


Delta Air Lines (NYSE:DAL) is another stock that has recently been struggling under the weight of its prior base. DAL had been trading sideways since last December before breaking down recently, despite holding the $11 level on several occasions over the past several months. This was a long base, which means there could be a large group of traders under water here. DAL quickly bounced back toward this level; how it reacts here will be crucial for investors to watch. A failure in this area would reveal that sellers remain in control and could lead to lower prices once again.

Source: StockCharts.com


Bottom Line
Despite the fact that the markets have shown some promise recently, these stocks remain vulnerable to further downside. All of them have fallen under a base and have put many market participants in a losing position. The markets could also realistically turn lower from here as well, adding pressure on potential sellers.

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 chance 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 from which a trader can base his or her 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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The author does not hold a position in any of the companies mentioned above at the time of this writing.

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