Anytime a trader or investor looks at a stock chart they should look to see if the instrument is making a new high, or a lower high. Continuous lower highs are a good indicator that further weakness is ahead for the equity.
Earlier today, the leading mining equipment company, Joy Global Inc (NYSE:JOY) reported earnings. The stock is trading higher by $1.91 to $57.73 a share. While this pop in the stock seems great in the near term the weekly and monthly charts are signaling a move lower. You see, the larger time frames have a series of lower highs on the chart beginning with the April 2011 top. Anytime a trader notices lower highs on a chart they must assume that the stock is ultimately going to trade lower before making a final bottom. According to my calculations, JOY stock has downside potential toward the $37.00 area before making a significant low. Now please understand, this does not mean the stock is going to decline today or even next week; the current chart pattern just tells us that the stock is ultimately going to trade lower. Therefore, as smart traders/investors we need to be prepared for that move.
Other stocks in the mining equipment sector also have lower highs on the larger time frames, so this chart pattern is not specific to JOY only right now. Leading mining equipment stocks such as Deere & Company (NYSE:DE), and Caterpillar Inc (NYSE:CAT) are forming the same exact pattern on the larger time frame, these stocks are just as susceptible to lower prices in the months ahead.