ARG Shows Classic Bearish Top

Airgas (ARG - commentary - Cramer's Take) appears to be setting up one of the more traditional bearish technical formations. The pattern is a head-and-shoulders pattern, which tends to show a change the most prevalent trend.

This company, which specializes in gases distribution, had a relatively flat first part of 2007; Price remained stuck around $40 to $45. The company then showed a vertical price spike higher in June that pushed the price to $50. Since that exhaustion point at $50, price filled the gap and the price retested the level from where the vertical price spike occurred.

A successful retest of a support from where a vertical price spike higher occurred is normally a very bullish signal, as it shows institutional support in the stock. After the successful retest of the support in August, the price was able to push above $50 with the broader market strength.

The break of the $50 level pushed the price above the "left shoulder" of the technical formation and began creating the "head." The price action of the "head" occurred between $50 and $55. The interesting part of the head is that the downtrend movement actually began in October, while the rest of the markets didn't sell off until November. This shows relative weakness.

The latest moves back to $50 should help to set up the "right shoulder" of the technical pattern. If the price of the stock can remain under $50.50 and break below the November support at $45.80, then the right shoulder will be confirmed. If the price moves back above $50.50, then the technical formation becomes sloppy and the probability for the setup to yield a downside profit becomes lower.

The ideal setup for this trade would be for entry at $50 with a stop at $52. The first profit target would be at $46, with a final profit target at $42. Should the stock price move under $47.75 without first offering an entry, this trade setup is no longer valid. If the stock offers an entry and moves over $50.50 but does not hit the stop, taking a flat exit would be the correct approach.

Source: Townsend Analytics

Updates on previous picks: Roper Industries (ROP - commentary - Cramer's Take) set up last week with an entry at $64. The first profit target of $62.75 was reached. The stop should now be lowered to $64.50; the next profit target is $55.

RadioShack (RSH - commentary - Cramer's Take) is still open with the entry at $22. The stop is now lowered to break-even at $22. The first profit target at $19 was reached, and partial profits could have been taken there. The final profit target will be at the 2006 lows near $14.50.

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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.