U.S. BioEnergy Failing to Find the Green

U.S. BioEnergy's USBE stock price has not been a positive recipient of the green initiative that continues to sweep across the nation. After a quick pop in 2006 to $17.70, the stock has been in a volatile downtrend since its retest of $16 in April 2007.

While I normally do not base my short trading decisions on fundamental analysis, it appears that investors who are interested in ethanol companies are more focused on the two major ethanol producers rather than taking the speculative approach of investing strongly in potential success stories.

Investors' appetite for risk in this group appears low, and this is being reflected in the stock prices of some of the smaller players.

Since the test of $16 in April, distribution pressure has been strong in shares of U.S. BioEnergy. This pressure appears to abate as the stock price approaches $10, but a descending triangle pattern is now forming. This type of technical pattern forms when investors try to support a price at a particular level, but are unable to attract new buyers as the price appreciates.

When stocks rally but volume does not pick up on the buy side, tests of resistance usually lead to a retest of the lows. As each new reversal from support leads to a lower high, a descending triangle forms.

This technical pattern tends to be bearish because investors become less confident to buy resistance. They are confident to buy support, but not resistance. The bears will likely take control if the most recent support of the descending triangle fails to hold.

If support breaks, investors who are long U.S. BioEnergy would most likely sell shares in order to minimize their capital loss, which in turn would create even stronger distribution pressure.

The ideal setup for this trade would be an entry at $11.20, with a stop at $12.25. The first profit target will be placed at $10.15 to satisfy a 1-to-1 reward/risk ratio, and partial profits could be taken here.

The final profit target will be determined if the price trades below $9.80. If shares of U.S. BioEnergy move under $9.80 without first offering an entry, this trade setup is no longer valid.

Shares closed at $10.52 Monday.

U.S. BioEnergy (USBE) -- Daily

Update on a Current Pick

Odyssey Healthcare ODSY traded below $9.55 before offering an entry at $10.25, invalidating the short setup. So this name has been taken off the Watch List.