Short Trader: Bears Clip Raven's Wings

The former highflier can't mount a successful rally.
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It appears that the bears have been plucking some feathers from

Raven Industries

(RAVN) - Get Report

. The industrial manufacturer provides products to various markets in the U.S., including construction and military/aerospace.

Over the past 12 months, the stock price has experienced a lot of volatility. Each new bit of good news for the company has led to less enthusiasm on the buy side.

From 2004 to April 2006, the stock price rose more than 400%, from $10 to above $40, reaching an all-time high of $42.70. But from April 2006 until now, resistance has led to a very sharp price reversal back to $26.

Even the strong period in the broader markets through the second half of 2006 couldn't bring Raven's stock price along with it. In fact, since October, the stock has formed a series of lower highs.

More recently the company announced fourth-quarter earnings growth March 12, and the shares could not gain upside traction. So it appears that distribution pressure remains very strong.

The technical pattern formed by these movements in the stock price is a descending triangle. This formation is the result of a strong support level and the fact that the stock cannot attract enough buyers on rallies to push the price above previous resistance levels. Instead, each attempt at a new high fails at a resistance level that is lower than the previous one.

This pattern is visible on the weekly chart below, marked by the pink circles. Descending triangles are typically bearish in nature, and a break of the triangle support confirms a downtrend continuation signal.

Given that scenario, the ideal setup for a short trade in Raven is to see the stock close below $25.40, which would confirm the downtrend signal. The entry then for this trade would be to see the share price climb back up to $25.50 and take entry there.

Raven (RAVN) -- Weekly

Once the trade is entered, the stop would be placed at $28.75, offering $3.25 in risk. The profit target would be at $22, where full profits could be taken.

If the price of the stock moves above $28.25 without first closing below $25.40, this trade setup is no longer valid.

Shares of Raven closed at $26.88 Monday.

Updates on Previous Picks

  • Alliance Resource Partners (ARLP) - Get Report is still open with the entry at $35.75. The stop is at $37.75, which offers $2 in risk. The first profit target is $33.75, and the final profit target will be determined if the current support at $33.50 fails to hold as support on a closing basis. Shares closed at $34.68 Monday.
  • Copa Holdings (CPA) - Get Report did not set up last week. The strategy is to see a close under $50 and then a return to $50 for an entry. Once the trade is entered, the stop would be placed initially at $55, offering $5 in risk. The first profit target would be $45 to serve the one-to-one risk/reward ratio; partial profits could be taken there. Then, depending on the price action, the original stop may be lowered closer to break-even. The final profit target would be $42.50. If Copa's share price closes under $50 but then moves below $49.25 without first offering the entry, this trade setup is no longer valid. If the price moves above $57.50 without first closing under $50, that would also invalidate the setup. The stock closed at $55.84 Monday.
  • Intermec (IN) also remains open, with its entry at $24.36. The first profit target of $22.25 has already been hit. Partial profits could have been taken there, and the stop should have been lowered to break-even. The final profit target is $19.50. Shares closed at $21.08 Monday.
  • PetMed Express (PETS) - Get Report is still open with an entry at $12.80. The stop at $14.25 offers $1.45 in risk, and the first profit target at $11.35 satisfies the one-to-one reward/risk ratio. Partial or full profits could be taken there. If partial profits are booked, the stop can be lowered to $13. The final profit target would be the September lows of $9.50. Shares of PetMed closed at $12.47 Monday.

At the time of publication, Schumacher held no positions in the stocks mentioned, although holdings can change at any time.

Chris Schumacher is a financial trader, speaker, writer, co-author of

Techniques of Tape Reading

and and contributor to Short Advisor

. He has delivered seminars throughout the U.S. and is a featured speaker at trading expos. He is a graduate of Ohio State University and has served as a guest lecturer at Ohio State University's Fisher College of Business as well as the Center for Entrepreneurship. While Schumacher cannot offer specific investment or trading advice, he appreciates your feedback;

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