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PRG-Schultz Bears Get Double the Fun

One of the technical patterns that signals that a stock is likely to decline is a double-top formation. That's the situation currently in PRG-Schultz (PRGX - Get Report), a business-services company that provides audits for medium-sized and large companies.

Beginning in September 2006, the stock displayed strong price appreciation, climbing from around $2.50 to $16.70 in March 2007. In addition, when price moved to the $16.70 level, volume increased dramatically relative to the average daily volume.

This type of high-volume move usually denotes an exhaustion point as buyers use up the majority of their capital to push the price higher. The retail trading crowd also becomes more active, which indicates that stronger resistance could be at hand. After hitting the $16.70 resistance level, shares of PRG-Schultz retreated back to $13 before running up prior to the company's earnings release on May 14.

The run-up to earnings pushed the price to former resistance at $16.70. Also, the move back up to the resistance level was again marked by an increase in volume. But after that exhaustion point repeated itself, volume and buy-side interest waned.

This is good news for the bears, however. Typically when there is an exhaustion point at a former resistance level -- which we can see in PRG-Schultz by its vertical price movement combined with an increase in volume -- the double-top formation leads to lower prices at least one more time.

As the chart below shows, PRG-Schultz seems to be forming such a double top. Thus shares have a higher probability of revisiting their former support level at $13 rather than continuing to climb.

The ideal entry strategy for this short trade would be to see the current base that is forming between $15.50 and $16.50 lead to a break of this current support area. If the share price breaks below $15.50, entry should be taken at this level on a tick back up, with a stop placed at $16.75. This would offer $1.25 in risk.

PRG-Schultz (PRGX) -- Daily

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