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Stock Less Than $1 Away From Triggering a Potential Sell-off

Serge Berger

Financial services firm, Charles Schwab Corporation (SCHW), had a massive rally off the November 2012 lows, along with the broader market. But since the stock peaked in mid-March, it has developed a topping pattern. If it slips below a nearby area of confluence support, it will trigger one juicy bearish formation.

The company's next earnings announcement is not scheduled until mid-July, which allows plenty of time for this trade to potentially work out. Additionally, the month of May tends to bring about seasonal weakness in stocks, further supporting a short-side setup.

First, let's look at a chart of the AMEX Securities Broker/Dealer Index (XBD), which counts SCHW as one of its components, and thus, offers up some interesting initial perspective on where the group currently sits from a technical point of view.

After nose-diving through much of 2007 and 2008, XBD rebounded quickly and sharply along with the rest of the market into the autumn of 2009. Although the index eventually managed to lift to a marginally higher high in February 2011, in the bigger picture, it has traded in an ever narrowing trading range since the early 2009 lows.

At present, the index is again churning at the upper end of this trading range, which, over time, does favor an eventual break to the upside.    

XBD Chart

Not surprisingly, the multi-year chart of SCHW looks similar to that of XBD. Although we do not see as nice of a narrowing trading range, the stock has shown an inability to break past its 2009 highs, and in October 2011, actually marginally undercut its 2009 lows. Ultimately, however, the area around the $11 mark held, and the stock has been on a steep incline off those 2011 lows.

The 200-week moving average managed to hold as resistance throughout the rebound off the 2009 lows, but in January 2013, the stock finally broke meaningfully past it. At this stage, a retest of the moving average, before potentially moving higher again, offers some good reference levels to focus on.

SCHW Weekly Chart

If we zoom in on the daily chart below, we can take the longer-term context and meld it with the near-term confluence support area. 

Off the November 2012 lows up to the recent March highs, the stock rallied 45% on a daily closing basis, and did so without any meaningful correction in price.

Since topping in March, SCHW has been on a bumpy ride. It completed the right shoulder of a broader head-and-shoulders formation. The neckline comes in right around the $16 to $16.20 area, which also coincides perfectly with the stock's 100-day simple moving average and the 38.2% Fibonacci retracement of the November-to-March rally. Thus, we have a clearly defined area of risk, and any break below it should accelerate the stock to the downside. 

A drop below the $16 area should take shares down to the next Fibonacci retracement support fairly quickly, which is the 50% retracement, and a level that coincides with the March 2012 highs (around $15.50), as well as the January 2013 breakout area. Further down, support comes in at the 61.8% Fibonacci retracement, and this level lines up perfectly with the September and December 2012 resistance line at $14.60. 

SCHW Daily Chart

Recommended Trade Setup:

-- Sell SCHW short on a daily close at or below $16
-- Set stop-loss at $16.50
-- Set initial price target at $15.50 for a potential 3% gain
-- Set secondary price target at $14.60 for a potential 9% gain
-- Time frame: 3-6 weeks

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