While I was engaged to be married,
became a favorite stock of mine through most of 2005 and 2006. My fiance would look at this wedding-planner Web site daily for hours on end, planning virtually every facet of our wedding, which took place in April 2006.
However, whenever I would mention this story to friends and colleagues, they would invariably say the same thing: I was seeing the effect of increased advertising dollars, which coupled with a broad market uptrend in 2005 and 2006 meant that this was a stock that did very well during this period.
Now, fast forward to the first half of 2007.
Since Knot shares experienced strong distribution pressure above $30 early in the year, the stock's story has been one of aggressive distribution. This type of selloff can be seen when there is consistent volume as price declines.
The decline will normally show a series, or progression of lower highs and lower lows. This is a result of failed rallies, which occur when institutional support is willing to step in and buy weakness for a bit, but are not willing to build huge positions and chase the stock higher.
Instead, these institutions are buying weakness in anticipation of retail traders who are willing to buy highs, and then they unload the position on them. Selling into this retail buying allows for quicker profits and less risk.
This aggressive distribution pressure appears to be continuing, and the first major test for the bulls since the stock's gap down in May will occur this week. If the bulls fail to drive the stock price higher above the downtrend channel resistance, the bears should push the stock price at least back to the downtrend channel support at $18.
The ideal setup for this trade will be to see price behavior fail at the downtrend channel resistance. If this happens, an entry at $21.50 with a stop at $23.50 will yield $2.00 in risk.
Knot (KNOT) -- Daily
The first profit target will be placed at $18, where partial profits could be taken. The final profit target would be $15.50.
If the price of the stock moves under $18.75 without first offering an entry, this trade setup is no longer valid.
Updates on Previous Picks
did not set up last week. The
ideal setup for this stock would be to see the range form between $8 and $9.40. If the price of the stock remains under $9.40 and breaks $8 support, the entry should be taken at $8 on a return to that price level. The stop would be $9. The profit target would be placed at the $7 support that formed in January and February 2007. If the share price breaks $9.40 before offering an entry, this trade setup is no longer valid.
Beacon Roofing Supply
did not set up last week. If the price hits the $18.50 entry, the stop would be set at $20.10. The first profit would be placed at $16.90, with a final profit target at $12.75. If the price closes under $15 without first offering an entry, this trade setup is no longer valid.
At the time of publication, Schumacher had no positions in stocks mentioned, although holdings can change at any time.
Chris Schumacher is a financial trader, speaker, writer and co-author of
Techniques of Tape Reading
. While Schumacher cannot offer specific investment or trading advice, he appreciates your feedback;
to send him an email.