One of the savviest investors of the past few decades is Carl Icahn. He just showed why he's so smart by selling shares of Herbalife at more than $60 after buying them last year in the $30s.
The pattern on the monthly chart below is known as a head-and-shoulders topping formation. Once the stock closes below the black neckline that connects the 2012 and 2015 lows, it will "trigger" this pattern. That line crosses $33 +/-$2 for the next year. So why is Icahn selling way up here? He probably won't say, at least not for a while. But, our decision support engine (DSE) is in alignment with his buy and now his sell, so let's explore why his sell makes tremendous sense now.
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Notice the stochastics have departed from the early 2015 oversold extreme near the 10% threshold. They are now testing the overbought extreme near the 90% threshold. This warns that the upside energy has been exhausted. Augmenting this overbought condition is the spike above the olive/gold line, which is the two-standard-deviation band (controlling 95% of normality). It's very hard for price to remain above this band for very long, as can be seen by this month's plunge back below its current reading of 68.72.
The daily bar chart (not shown here), where price just tested and reversed from the three-standard-deviation band (not shown on this chart). That extreme controls 99.7% of normality, and usually is explored for periods lasting a few hours to a few days, but never for periods more than that. This combination put members of our live-market Trading Room and DSE Alerts services on warning that buying actions were no longer indicated, and selling actions were/are.
Next, the rise off Icahn's 2015 entry point is only an up/down/up corrective pattern under Elliott Wave and Fibonacci theories, and forms the near-mirror image of the pattern from early 2012 into the late 2012 low, and the rise into the early 2014 peak. If the mirror holds true, the next move of significance should be the red arrow's slide into the green zone, which will eventually "trigger" the head-and-shoulders pattern by breaking the neckline, 25 points below the current price.
The $58 level is important, too, as it represents the 200-day moving average. This level is considered the institutional buy/sell indicator, as those big trend-following investors often have rules that require some selling upon the break below that line. Upward trends are thought to be broken when prices are below that indicator.
Whatever Icahn's reasoning, even if it's only the doubling of his investment value in the past year, our DSE's analysis leads us to conclude that $58 +/-$3 should be used as the window to exit long exposure and enter short exposure. This area is highlighted on the chart as the "ominous exit" level. $43 +/-$2 is the "disastrous" exit level, which hedge funds and the rest of the crowd will use to throw in the towel on their long-and-wrong exposure.
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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.