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Stock on the Verge of a Double-Digit Plunge Into No-Man's Land

Serge Berger

After creating a topping formation throughout most of May and June, Avon Products (AVP) finally saw notable follow-through selling late last month. This has brought the manufacturer and direct seller of beauty products into no-man's land, where there is no meaningful technical support holding up the stock from a short or long-term perspective.

After some consolidation in the near term, AVP looks likely to continue its slide lower, much like the broader consumer staples sector.

To gain some perspective, we'll first go to the multi-year chart looking back to the stock's summer 2008 highs. After topping out in August 2008, AVP quickly cascaded lower, ultimately reaching an important bottom in March 2009. 

Along with the broader market, AVP then began its sharp snap-back rally toward a December 2009 relative lower high versus the 2008 highs. At this point, the stock began a notable decoupling from the broader market as measured by the S&P 500 benchmark index. It consistently dipped lower over the ensuing years toward a November 2012 retest of the 2009 bottom around the $13.70-$14 area.

The sharp rebound off this double-bottom formation created the second lower high with respect to the 2008 top, and on the weekly chart, draws a simple line of resistance (blue). This 2008 downtrend line now offers those looking at the stock from a longer-term point of view an important area to overcome.    

AVP Stock Chart - Weekly

On the stock's daily chart below, note that this third lower high also coincided with simple lateral resistance around the $24 mark, dating back to 2012. In other words, $24 is an important number to watch if and when the stock manages to push significantly higher.

AVP Stock Chart - Daily

Given the slow stalling-out process that AVP experienced just north of the $24 mark during late May and early June, followed by a quick-but-severe, three-day, 10%-plus sell-off in mid-June, a fake breakout may have occurred, which now should test further downside in the stock.

Moving on to the close-up chart below, note that the mid-June sell-off threw the stock into a consolidation phase just beneath its 100-day simple moving average (upper blue line). This consolidation formation has taken the shape of a bear flag, which as the name implies, usually resolves to the downside. A similar bear flag pattern can currently be spotted on the sector chart of the Consumer Staples Select Sector SPDR (XLP).

A continued drop in AVP now looks to have a good probability of reaching a target near the 200-day simple moving average, and as a secondary target, potentially also fill the large post-earnings gap up (gray shaded box) from Feb. 12. 

AVP Stock Chart - Close Up

In general, the trade I see setting up here is a classic mean-reversion trade to the short side that is closely linked to the broader market, but played via an individual stock, with defined risk.

Recommended Trade Setup:

-- Sell AVP short at or below $20.70
-- Set stop-loss at $21
-- Set initial price target at $18.50 for a potential 11% gain in 3-6 weeks

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