The markets flashed another distribution day on Tuesday, making it the fourth high-volume down day in the past six days. While the markets have consistently battled back from any selling over the past several weeks, now is not a time to be getting reckless in buying weakness. More and more charts are showing topping patterns and even if the markets can avoid a correction, it may still take some time for these stocks to absorb the recent selling pressure.
IN PICTURES: 7 Tools Of The Trade

One of these stocks that is now showing a topping pattern is MIPS Technologies (Nasdaq:MIPS). This has been one of the better performing stocks over the past few months but it has recently come under pressure. The first warning sign was the quick failure of a breakout attempt early in 2011. MIPS fell under its 50-day moving average a few sessions later and then failed when it tried to reclaim the average. It proceeded to undercut the entire base and is now testing that level from underneath. MIPS has already completed a topping pattern by closing under its base. A failure here could lead to much lower prices.

Source: StockCharts.com



Power-One (Nasdaq:PWER ) is another stock that recently undercut its base. PWER had been trading in a sideways range for months holding support on each pullback to approximately $8.35. However, PWER also was failing on any sincere rally attempt and the last breakout attempt in February led to a sharp gap down toward the bottom of the base. After a few days of hovering near the bottom of the base, PWER finally turned around and completed the top.

Source: StockCharts.com



Walter Energy (NYSE:WLT) is a stock that could be in the early stages of topping out. It has been in a steady uptrend and appeared to be forming an ascending triangle, which is typically a continuation pattern. However, WLT dipped under this pattern a few days ago and has held beneath its 50-day moving average for a couple of weeks. WLT attempted to climb back into its base but could be failing here. Traders should keep a close eye on the $120 level to see which direction WLT takes from here.

Source: StockCharts.com

While Korn/Ferry International (NYSE:KFY) hasn't technically completed a topping pattern, it is about as close as it can get. The bottom of the current base it is in lies near $22 per share and KFN is currently testing this level. KFN has also been unable to trade back above its 50-day moving average since dropping under this level several days ago. Traders need to watch this test, as a break under the current base would complete a top that projects down toward the $19 level.

Source: StockCharts.com

The Bottom Line
While the indexes have continued to recover and hit new highs, the number of stocks topping out has been increasing. Participation in the current rally has been dwindling, showing a negative correlation. While it is feasible that the markets will continue to rise for some time, the topping patterns in many stocks will still take time to heal even in a best-case scenario. Under worst-case scenarios, many of these stocks could easily drop much further. Traders should keep an eye on how these stocks fare in their current tests of resistance levels as they could set up some shorting opportunities, especially if the markets are finally ready for a rest break.

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

Related Articles
  1. Active Trading Fundamentals

    4 Stocks With Bullish Head and Shoulders Patterns for 2016 (PG, ETR)

    Discover analyses of the top four stocks with bullish head and shoulders patterns forming in 2016, and learn the prices at which they should be considered.
  2. Chart Advisor

    Uptrending Stocks Dwindle, a Few Remain (EW, WEC, WR)

    The number of uptrending stocks is shrinking, but here a few that remain in uptrends.
  3. Chart Advisor

    Trade Setups Based on Descending Trend Channels (LBTYK, RRC)

    These descending trend channels have provided reliable sell signals in the past, and are giving the signal again.
  4. Chart Advisor

    How Are You Trading The Breakdown In Growth Stocks? (VOOG, IWF)

    Based on the charts of these two ETFs, bearish traders will start turning their attention to growth stocks.
  5. Chart Advisor

    Breakout Opportunity Stocks: CPA, GNRC, WWE

    After a period of contracting volatility, watch for breakouts and bigger moves to come in these stocks.
  6. Chart Advisor

    3 Charts That Suggest Now Is The Time To Invest In Real Estate (VNQ, SPG,PSA)

    Real estate assets have some of the strongest uptrends around. We'll take a look at three candidates poised for a move higher.
  7. Chart Advisor

    Stocks With More Upside Due to Bear Traps (TAP, SPY)

    A bear trap is a pattern that typically leads to at least a short-term rise in prices. Here are stocks exhibiting the pattern.
  8. Active Trading Fundamentals

    New Traders: Trade the Market in 5 Steps

    New traders shouldn’t throw money at securities without knowing why prices move. Follow these five steps to tilt the odds in your favor.
  9. Chart Advisor

    Watch For a Bounce in These Emerging Markets (BRF, PEK)

    While downtrends are clearly in control of the direction of many emerging market ETFs, short-term indicators suggest a bounce higher could be in the cards.
  10. Investing Basics

    Valuation Models: Apple’s Stock Analysis With CAPM

    The capital asset pricing model, or the CAPM, estimates the expected return of an asset based on the systematic risk of the asset’s return.
RELATED FAQS
  1. What is Fibonacci retracement, and where do the ratios that are used come from?

    Fibonacci retracement is a very popular tool among technical traders and is based on the key numbers identified by mathematician ... Read Full Answer >>
  2. What are some of the most common technical indicators that back up Doji patterns?

    The doji candlestick is important enough that Steve Nison devotes an entire chapter to it in his definitive work on candlestick ... Read Full Answer >>
  3. Tame Panic Selling with the Exhausted Selling Model

    The exhausted selling model is a pricing strategy used to identify and trade based off of the price floor of a security. ... Read Full Answer >>
  4. Point and Figure Charting Using Count Analysis

    Count analysis is a means of interpreting point and figure charts to measure vertical price movements. Technical analysts ... Read Full Answer >>
  5. What assumptions are made when conducting a t-test?

    The common assumptions made when doing a t-test include those regarding the scale of measurement, random sampling, normality ... Read Full Answer >>
  6. How are double exponential moving averages applied in technical analysis?

    Double exponential moving averages (DEMAS) are commonly used in technical analysis like any other moving average indicator ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center