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Ivan Mutaftchiev
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Ivan Mutaftchiev has been managing accounts since 2002. Ivan searches the markets for profitable low-risk arbitrage opportunities such as mergers, takeovers, spinoffs and other special situations. Combining his dual experience in the investment industry and in the legal field, gives Mutaftchiev... More
  • Two Stocks That Have Topped After Weak Recent Breakouts 0 comments
    Jan 6, 2011 10:56 PM | about stocks: HTSI, HAE

    They say that a rising tide lifts all boats, and we are definitely in a bull market, but the holders of these two stocks should do well to exit them, before any gains turn to losses, as the 2 issues below have likely seen their tops recently.

    Note that Equivolume charts are used for this analysis. They are similar to candlesticks, except the width of each bar corresponds to the volume traded on that day (i.e. the fatter the bar, the more volume was traded that day). This approach makes it much easier to spot what volume corresponds to what day, and judge the importance of moves accordingly.

    Ruddick Corp (RDK) recently broke out through long term resistance, after a period of consolidation that started in April of 2010. (See chart below.) However the breakout on Nov 5, albeit a large move, happened on a less than average volume. See point A on the chart. This indicated that the shorts had not capitulated (and bought to cover) but were instead holding to their positions. Predictably the move did not hold and retraced below the former resistance level at $38 within a few days. Another attempt for a breakout on Nov 18, on just as miserly volume, failed to even hold its intraday highs. Something was clearly amiss with that rally.

    RDK Daily Equivolume chart

    For the rest of November and early December, the price was stuck within a tight range. Then on Dec 17 a large decline brought gigantic volume. The stock came in $1.50 that day, but the real importance of the move lies in the volume - 2.3 million shares, more than 10 times the volume of each of the failed-breakout days. See point B on the chart and notice the width of that day's bar. The stock continued its slide the next day, for an almost identical move, and on a healthy, but somewhat decreased volume.

    It is always educational to watch a stock, after a large decline like that. In a downtrend, a stock is expected to have its big moves to the downside, and the pullbacks to be smaller and on much lesser volume. This is exactly what we witnessed, following the two big days down. RDK pulled back over 8 days, with smaller moves, which often overlapped each other, and an average daily volume of just 100-200K shares. The bars of the pullback days formed a classic bear flag - heading up, but of no major significance due to the lackluster volume (flag at C). For those traders aggressive enough to go short, despite the bullish general markets, the support level to be broken was the lower channel of the bear flag (line C). The bears soon got their chance, when on Jan 4, the channel was penetrated by a large move (point D) and with volume greater than any of the preceding days of the pullback. This was a confirmation that a downtrend is in fact in effect. The stock has continued down for the 2 days since.

    Haemonetics Corp (NYSE:HAE) also easily broke out of its multiple long- and short-term resistance levels at $59-$60. See chart below. It gapped up on December 1st, continued ever higher during the day and closed at its highs. It continued up the next day, and never really looked back or retraced to its former resistance levels. However the breakout and the following rally happened at transactions volume, which was average at best. Soon the stock was up against $65 level, an old top from February 2009, and then it seemed to run out of momentum.

    HAE daily equivolume chart
    After what started as a healthy pullback in the last week of December, the bulls lost control, and HAE had two big down days this week, on Jan 3rd and 4th. Both days, and especially the first one, had moves and volumes unmatched during the recent rally. The volume of the decline signifies it is a reversal and not merely a retracement. The stock is now back below its former resistance levels, and may have started working on a bearish flag pullback similar to RDK. I will not wager whether HAE will continue lower or consolidate at the current level for a few months, but the rally is certainly over. If in fact a pullback on lower volume is made over the next weekor so, and then the decline continues on increased volume, the move is likely to take the stock down to the long-term support levels at $53.

    Disclosure: I am short RDK.

    Stocks: HTSI, HAE
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