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Tickers in this Article: MBLX, DLB, FNSR, CBRL
Traders need to be on high alert this week because the market is starting to show some serious warning signals. While there are no guarantees that the markets will fall apart, the current environment remains risky. Many individual stocks that were looking healthy as recently as a few weeks ago have begun to see increased selling pressure. In a healthy environment, stocks that build a strong base and then break out usually follow through with a move to higher prices. However, recently stocks have reversed from the top of their ranges and in many cases have fallen down through their support levels.

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Metabolix (NasdaqGM:MBLX), for instance, cleared its base in July as it attempted to break out. Despite the relatively low volume, the breakout looked legitimate. However, the move quickly failed and MBLX reversed to fall back into the base. While this happens fairly frequently, a stock will typically find support once it falls back into its base. In this case, MBLX continued to slide to the bottom of its base and then proceeded to break down further. This is not healthy price action and shows an overabundance of sellers. (For more, see Trading Failed Breaks.)


Dolby Laboratories Common Stock (NYSE:DLB) is another stock that appeared to be emerging from a healthy base before things abruptly turned sour. DLB had been consolidating in a large range after rising steadily for several months. DLB was swinging back and forth between the $70 to $60 level for about four months before attempting to clear the base in late July. While the initial breakout failed before it began, the real weakness emerged a few days later when DLB failed to find support near its 50-day moving average. After failing to attract buyers at that level, DLB proceeded to test the bottom of the base near $60. This is a level that would be expected to hold in a healthy environment, but DLB simply churned in this area for a few days before slicing through support. DLB continues to show weakness and what appeared to be a base has now become resistance.


Finisar Corporation (NasdaqGS:FNSR) is another stock that has come under pressure despite boasting a healthy chart as recently as last month. FNSR had been in a consolidation pattern since early April and appeared to be ready to break out after clearing an important resistance line in July. It actually surged to new yearly highs and began to base at this level before coming back to test the breakout area. While it is fairly typical behavior for a stock to pull back to test the breakout area, FNSR ended up completely rolling over a few days later and is now at the bottom of its established base. If FNSR fails to hold at this level it would imply much lower prices with the current base acting as a top. (For more, see Trade Broken Trendlines Without Going Broke.)


Cracker Barrel Old Country Store (Nasdaq:CBRL) is an example of a stock that hasn't quite failed yet, but is probing the lower boundaries of its established base. CBRL attempted to clear an important trendline in late July and while the failure was not as spectacular as the preceding examples, the fact that CBRL could not clear resistance and ultimately traded back to the bottom of its base reveals that sellers are beginning to overwhelm buyers. In the near term, the $45 level needs to be watched along with the 200-day moving average, which is currently near $44.


Bottom Line
With the markets once again threatening to break down, traders need to careful and weigh the different clues the markets are offering. There are no guarantees that the markets will have a full-fledged breakdown here, and there are some signs that the markets are beginning to become oversold already. However, the price action in the stocks above is revealing a market that is still unhealthy. Failed breakouts are appearing at an increasing rate and beyond simply failing, many are reversing into downtrends. Until the price action improves in many of these individual stocks, traders are better served sitting on their hands or shorting if their trading plan accounts for it. In order for the market to move higher it will need stocks to follow through after clearing a base and continue to set a pattern of higher highs and lows.

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.

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