Short Trader: Bears Fly South With Copa

It looks like the bears are donning their Panama hats and heading south aboard Copa Holdings(CPA Quote). The company is the parent of Copa Airlines, which is based in Panama and services the Americas and Caribbean. It's also the parent company of AeroRepublica, a domestic carrier in Colombia.

After Copa announced positive earnings last week relative to the rebound taking place in the airline sector, the airline's share price could not resume an uptrend confirmation signal. Instead, the price remained in the range between $50 and $57.50.

This range happens to be the right shoulder of a head-and-shoulders technical formation. This type of pattern tends to be bearish and has a higher probability of leading to a break of supports and a test of former lows than producing an upward move.

A head-and-shoulders technical pattern forms when a stock price congests between some range-extreme levels for a period of a couple of weeks to a couple of months. This action forms the left shoulder of the formation. Then price breaks the left shoulder-range resistance and moves higher, forming the head of the technical pattern.

Then price is rejected with strong distribution pressure, which pushes the price back to the former left shoulder range, where it begins to form the right shoulder. The final phase of the bearish behavior occurs when the right shoulder support level fails to hold, and price moves lower to test former supports.

For Copa, the range in the right shoulder is defined by last week's trading between $50 and $57.50. The ideal bearish setup requires that the price stays under $57.50, and the confirmation of this short trade setup would be to see a close under $50 a share.

If Copa's stock price closes under $50, the strategy is to look for a return to $50 for an entry. Once the trade is entered, the stop would be placed initially at $55, offering $5 in risk.

Copa Holdings (CPA) -- Daily