Odyssey Healthcare Shares Ailing

Shares of Odyssey Healthcare (ODSY Quote), a company that provides hospice care, have experienced weakness during the second and third quarters. The stock price has trended lower since the beginning of the year from $14 to just under $10 in August.

Furthermore, the volume has dropped off dramatically in the last few weeks. Traders can look at this drop in volume in two different ways. The bullish camp would focus on the lack of new selling as the stock bases near lows. If there is a lack of stronger selling, then perhaps a support level has formed and the stock can trade back up to $12 or so.

The bearish camp will focus on a lack of buying at the support level, which should allow distribution pressure to push the stock below the most recent support level at $9.60.

After watching this stock trade for a few days, I have come to the conclusion that higher probability exists for the stock to trade below $9.60 as the lack of buy-side volume should allow for distribution pressure to become stronger. This type of stock price behavior is outlined in my book, Techniques of Tape Reading, as the Drop-Base-Implode setup.

This setup relates to tape reading because it shows how minority behavior brings in majority behavior. In other words, institutional money -- the minority -- tends to slowly pressure the stock price in order to create a stable downtrend. Then retail traders -- the majority -- who are long the stock, all begin to sell at once, creating a sharp drop lower.

The aspect of profitability exists in the "implode" portion of this setup. The first part of the formation is shown when Odyssey's stock price gapped down from $11.75 to $10.75 in late July. This is the "drop" portion. The strong reversal back to $12 failed to stabilize and the price reverted back to the $10 support area. That's what is forming the "base" portion of the setup.

The final part of this trade should be the "implode" portion. When there is a combination of a strong reversal that fails to attract buyers and a base near the lows, it shows that buyers are not willing to buy the stock at the current price. They are waiting for lower prices. If shares of Odyssey close below $9.55, lower prices should occur.

Odyssey Healthcare (ODSY) -- Daily

The setup for this short trade will be an entry at $10.25, with a stop at $11. This offers 75 cents in risk. The stock then needs to close under $9.55 to confirm the downtrend continuation signal, or "implode." So the first profit target would be placed at $8.80. The second profit target will depend on how the price behaves at $8.80.

If the stock moves below $9.55 without first offering an entry, this trade setup is no longer valid. Shares of Odyssey closed at $9.78 Friday.

Update on a Current Pick

American Campus Communities (ACC Quote) closed below $27 without first offering an entry. This setup is no longer valid and has been taken off the watch list.