Shorts Ready to Move Stanley Furniture By Chris Schumacher RealMoney.com Contributor 9/24/2007 9:17 AM EDT

Stanley Furniture (STLY) is a residential furniture store that broke into a bearish technical pattern after failing at the $20 support area that has spanned for three years. When the price fell below this area of support, volume spiked higher and then decreased again.

This would suggest that buyers have not been confident to step up and buy the stock as it tries to appreciate again. Instead, buyers are more apt to look to buy weakness rather than strength. The main technical aspect to this stock behavior is that $20 should now act as a resistance if the price should try to regain this level.

The current period is showing a price coil. Price coils form when the trading sessions' range narrows. Eventually, this coil leads to a price explosion that normally takes out stop losses on the side of the break. This run of stops also adds to the price explosion and tends to create a strong spike that is ultimately unsustainable.

The ideal setup for this stock would be to see the price coil push higher. This would require those who are still short the stock to probably take in more profits and run the short exposure that was just recently built out of their positions. If this can happen, price should seek $20 again as the former support. It is here that short exposure could be taken with a stop at $21.20. This would offer $1.20 in risk.

The first profit target would be at $18.80 to satisfy the 1:1 risk/reward ratio. Partial profits could be taken here. The final profit target would first require a break of the most recent support at $16. If this occurs, then we'll watch price action below that to determine a final profit target.

If the price moves under $16 without first offering an entry, this trade setup is no longer valid.

Updates:

US BioEnergy (USBE) is being taken off of the watch list. The stock moved under the invalidation level of $9.80.

Please note that due to factors including low market capitalization and/or insufficient public float, we consider Stanley Furniture to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

RELATED STORIES
The Numbers Say the Rally Should Stall
This is No Time to Turn Bullish
Expect a Retrenchment, Not a Downturn

At the time of publication, Schumacher had no positions in the stocks mentioned, although holdings can change at any time.

Chris Schumacher is a financial trader, speaker, writer and co-author of Techniques of Tape Reading. While Schumacher cannot offer specific investment or trading advice, he appreciates your feedback; click here to send him an email.

Read our conflicts and disclosure policy.