Editor's note: Formerly, Chris Schumacher's short trading ideas were available only to subscribers to TheStreet.com's Short Advisor. Now these picks are being offered to RealMoney.com and TheStreet.com readers.
Alliance Resource Partners
, which produces coal for U.S. utility and industrial users, is sending up bearish smoke signals.
The stock price of this company was very volatile in the second quarter of 2006 when it moved from $34 to $43.75 and then back again. Since that wide swing, the price of the stock has formed a technical series of lower highs and stable support.
This formation of a descending triangle is typically bearish. The pattern, which you can see on the chart below, shows that any bullish attempt to break out to new highs is immediately met with distribution pressure, which pushes the price back to the support level. The only positive is that the support level continues to hold and keeps the stock price from falling more.
Triangle formations typically create a coiling effect. Coiling usually refers to the time period in which price reaction becomes sufficiently compressed that a break in either direction creates a strong move in the direction of the break. Given that this is a descending triangle, a break of support is more likely and should send the accumulation crowd packing for a while.
If this accumulation pressure disappears, there is very little support that would help stabilize the stock price. So the probability of a strong move lower becomes even greater.
Alliance's share price enjoyed a slight reprieve this past week because of its earnings report last Monday, Jan. 29, which beat analysts' expectations. Since then, shares have run up about a dollar.
However, even though Alliance investors continue to reward short-term catalysts, causing the stock to rally briefly, the long-term view still shows distribution pressure owns this stock. Therefore, Alliance still has a higher probability to see new lows.
Alliance Resource Partners (ARLP) -- Daily
The ideal entry strategy for short exposure would be to see an entry at $35.75 with a stop at $37.75. This offers $2 in risk. The first profit target would be placed at $33.75, and the final profit target would be determined if the current support at $33.50 fails to hold as support on a closing basis.
Note that if the stock price should move under $33.50 without first offering an entry, this trade setup is no longer valid. Shares closed at $35 Monday.
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set up last week. The ideal entry for this setup would be to see the price move back up to $12.80. With an entry at $12.80, putting a stop at $14.25 will offer $1.45 in risk.
The first profit target would be placed at $11.35 to satisfy the 1-to-1 reward/risk ratio. Partial or full profits could be taken there. If partial profits are taken, the stop can be lowered to $13, and the final profit target would be the September lows of $9.50. If the price closes under $11.25 without first offering an entry, this trade setup is no longer valid. Shares closed at $12.54 Monday.
on the Watch List. The ideal setup for this short trade would be to see an entry at $25 with a stop at $26.50. This offers $1.50 in risk. Note, however, that if the share price moves under $21.75 without first offering an entry, this setup is no longer valid.
The first profit target would be placed at $23.50 to satisfy the 1-to-1 reward/risk ratio. Price then has to close under $20.85 to confirm the downtrend. If this happens, the next profit target will be placed at $20 a share. The stock closed at $22.89 Monday.
with an entry at $24.36 on a gap-up open Jan. 16. The stop is at $26.25, which offers about $2 in risk. The first profit target would be $22.25, where half of the position could be closed to serve the 1-to-1 reward/risk ratio. The final profit target would be based on the February 2004 low at $19.50. Please note that Intermec reports earnings Thursday, Feb. 8. Shares closed at $25.02 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
. 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;
to send him an email.