PDCO is a stock that is particularly interesting to a chartist as the stock has recently shown a breakaway gap as well as a runaway gap with no fundamental news having been released. Such a chart formation is rare and is often indicative of a stock that is ready to go in the opposite direction strongly. In addition, there have been over 267,000 shares sold over the past 6 weeks by insiders and no purchases, other than acquisitions or options exercises at much lower prices. Such chart action, in conjunction with the insider selling, seems to be a strong sign that the stock is heading lower.
Back in November of last year, probably due to some negative fundamentals news, PDCO took a big fall from the $38 level down to the $28, in a matter of just a few days. The drop created a large gap area between 36.92 and 33.20 that looked imposing. Nonetheless, over the next 3 months the stock rallied and was able to close the gap but on February 28 much of the insider sales came in and a drop down to the 33.61 level was seen. The stock once again re-started the up-trend that saw it reach 37.78, 8 trading days ago.
Upon getting close to the $38 level from which the original drop began, the stock two days later gapped down from 36.92 down to 36.50 and three days later gapped down again from 36.04 down to 34.49 creating the breakaway and runaway gap scenario.
The breakaway and runaway gap scenario is a rare occurrence and can be very indicative of continued follow-through in the direction of the gaps for the next few months. In addition, such a formation has very clearly defined parameters, as a closure of the runaway gap will negate the entire formation. One additional reason for thinking the stock is heading lower is an open gap between 33.39 and 33.71 that should be filled as well as the stock having gapped below the 50-day MA on the last gap down.
Resistance should be quite strong at the 50-day MA as well as three previous intra-day highs seen back in mid January. All converge right at 34.79. The low of the runaway gap area should also be strong resistance and that is at 35.39. That price will be the stop loss level as well. Support is decent at 33.50-33.61 (33.68 on a daily closing basis) but if that level is broken, while trying to close the gap down at 33.39, there is no support of any consequence until 31.72 is seen. There is additional support using the weekly chart at 30.95 and then the last support of any consequence is down between 29.91 and 30.16. A break of that level would be quite negative.
It is possible that a rally this week to test the 50-day MA as well as the three intra-day highs at 34.79 will be seen before continuing to the downside.
Sales of PDCO between 34.50 and 34.79 and placing a stop loss at 35.38 and having an objective of 31.72 will offer a 4-1 risk/reward ratio.
My rating on the trade is a 8 (on a scale of 1-10 with the strongest probability rating being 10).
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