Short Trader: Bears Clip Raven's Wings

It appears that the bears have been plucking some feathers from Raven Industries (RAVN Quote). The industrial manufacturer provides products to various markets in the U.S., including construction and military/aerospace.

Over the past 12 months, the stock price has experienced a lot of volatility. Each new bit of good news for the company has led to less enthusiasm on the buy side.

From 2004 to April 2006, the stock price rose more than 400%, from $10 to above $40, reaching an all-time high of $42.70. But from April 2006 until now, resistance has led to a very sharp price reversal back to $26.

Even the strong period in the broader markets through the second half of 2006 couldn't bring Raven's stock price along with it. In fact, since October, the stock has formed a series of lower highs.

More recently the company announced fourth-quarter earnings growth March 12, and the shares could not gain upside traction. So it appears that distribution pressure remains very strong.

The technical pattern formed by these movements in the stock price is a descending triangle. This formation is the result of a strong support level and the fact that the stock cannot attract enough buyers on rallies to push the price above previous resistance levels. Instead, each attempt at a new high fails at a resistance level that is lower than the previous one.

This pattern is visible on the weekly chart below, marked by the pink circles. Descending triangles are typically bearish in nature, and a break of the triangle support confirms a downtrend continuation signal.

Given that scenario, the ideal setup for a short trade in Raven is to see the stock close below $25.40, which would confirm the downtrend signal. The entry then for this trade would be to see the share price climb back up to $25.50 and take entry there.

Raven (RAVN) -- Weekly