Bears Betting on Bank of the Ozarks

Bank of the Ozarks(OZRK Quote), a Southeastern U.S. regional bank, peaked in late 2006 at $35 a share and has since formed a technical downtrend channel. This makes the stock a candidate for a potential short trade.

Downtrend channels typically form when price behavior is not attracting new money as price rises. While there are plenty of traders and investors willing to buy on weakness, it is the ability of price to test resistance and break higher with volume that finally negates a downtrend channel.

As you can see on the chart of Bank of the Ozarks below, each attempt at a breakout is met with heavy distribution pressure. The price of the stock reverts back to the support of the downtrend channel.

The most recent attempt to move higher occurred in April 2007. The failure at the channel resistance in April shows a lack of confidence for bulls to buy highs. This should result in the stock price slowly moving back to the channel support.

Currently, the bulls are showing a propensity to draw a line in the sand near the $28 level. They are desperately trying to shore up the stock price at this technical support, looking to push the price back to channel resistance near $29.25.

However, if the stock price can instead close under $27.90 without first breaking above $29.25, then there is a higher probability of this financial stock seeing the channel support near $26.

The ideal setup for this trade will be to see a close under $27.90, and if this happens, look for a return to $28.25 for entry. The stop would be placed at $29.50. This offers $1.25 in risk.

The profit target at $26 should offer a nearly 2-to-1 reward/risk scenario. If the stock price moves above $29.25 without first closing below $27.90, this trade setup is no longer valid.

Bank of the Ozarks (OZRK) -- Daily

Also, if the stock closes below $27.90, but moves under $27.50 without first offering an entry at $28.25, this also negates the setup.

Shares closed at $28.28 Monday.