By L.A. Little of Technical Analysis Today
As a trader, you're always looking for general rules you can apply to your trading. With respect to a company's secondary offerings, they generally offer opportunity in bull markets, while in bear markets they represent risk.
The reasoning is that in an expanding economy a company typically issues debt to expand its operations. That expansion results in increased revenue and eventually greater profits. In a bear market, however, money is typically raised to pay down debt, to restructure and/or to fund continuing operations. This doesn't expand the top-line numbers. Without an expected revenue increase, the dilution that results from the secondary represents risk, not opportunity.
So, are we in a bull or bear market?
In the current market environment, the bull and bear opinions are extreme. Rather than try to answer this larger question concerning the general market, it is probably best to look at the particulars of the companies you're interested in.
This article will concentrate on
Marshall & Ilsley
, a regional banking concern. Last week, MI priced 136 million shares at $5.75, raising almost $800 million. So is it a buy or a sell?
What Do the Charts Say?
As a trader, I typically let the charts guide me. Although it is wise to stay abreast of the fundamental events that can affect a stock's price, a technician implicitly assumes that those fundamentals are captured in the charts. So what do MI's charts say?
From a longer-term perspective, Marshall & Ilsley exhibits a large triangular continuation pattern that is bearish. See the following chart.
Triangle formations are usually hesitation areas. Most of the time, they resolve themselves with a break in the direction of the prevailing trend. The prevailing trend on this long-term time frame is down. Couple this with the fact that volume has and continues to expand on selling. Volume expansion on sell days is never a good thing if you are a buyer.
Another pattern of note on a long-term basis is the sideways channel that has developed. The channel boundaries range from roughly $4 to $10. That is a huge range for a $6 stock. That probably offers some great trading opportunities at the edges (buying near the bottom and selling near the top). Given that the boundaries are pinned by high-volume bars, breaking out of this range will require an enormous amount of buying or selling.
Looking at the weekly chart below, we can see that the secondary last week resulted in another large volume spike lower. That spike lower broke the Aug. 31 swing low at $6.25. This is a problem. When the market expands on volume into a swing point and breaks it, it is telling you that it intends to march down to the next swing point. That next lower swing point is at $4. Remember, $4 was the bottom of the range on the long-term time frame.
Is There a Short-Term Trade Here?
For traders who are in and out of positions more frequently, is there an opportunity here? Clearly, from what already has been said, I'm not looking to be a buyer here, although the stock could easily work sideways to higher for a while before heading lower. When a stock drops hard and fast with a large price range and expanding volume, it usually sees some profit-taking (short-position covering) and bargain hunting (new buying).
Technically, the conditions that lead to a temporary price rise, or at least a consolidation, are exhaustive selling and chart support. One could argue that a 33% haircut in four weeks is exhaustive. From our weekly view, we know that there is chart support at the $5.40 to $6 level. Therefore, the two conditions required are present.
The buying and short covering will last only so long though and it will carry the price up only so far. Assuming a price rise, that is where the opportunity may arise for a trader. The short interest is not too large (less than 4% at the time of this writing) and the charts are quite negative.
On any chart where you have a gap-down trade that takes back weeks of price gains, there exists a significant amount of resistance on any subsequent rise in price. For example, anyone who purchased MI since August is now in a losing position. They are natural sellers looking to get out on any price rise. That is what resistance is all about.
Therefore, with a slew of sellers waiting in the wings, a shrewd short-seller can look to use those sellers as their backstop, shorting the stock as it rises into the gap area (where no trades occurred between $6.75 and $7). The risk for that trade is around the $7.50 level on a daily chart. You can see the horizontal downtrend resistance lines drawn on the chart.
Potential reward we already have seen lies at the $4 level. Since you don't want to take a significant risk for a small reward, you need the price to rise into the $6.75 area or higher to make this an ideal short sell. That would put your risk at about 75 cents, while your expected reward lies at a best case $2.75. Worst case reward is a retest of the lows this past week just under $6. If you put the trade on and prices drop into the $6 area, and volume dries up, then you should take all or partial profits.
So, from a technician's perspective, that is the technical setup on Marshall & Ilsley. It's hard to see a long scenario in these charts. If you are holding it long, I would look for alternatives on a bounce. If you want to short it, I've laid out the parameters for that angle.
Until next time, keep trading the charts!
L.A. Little is an author, professional trader and money manager who writes daily on
, a free educational site for traders and investors. He has been featured in Stocks & Commodities magazine and is the author of