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Apollo Group: A Chart View

Eventually this stock will offer up some great longer-term buys, but until then you have to be very patient.
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NEW YORK (TheStreet) -- Sometimes it can be just as instructive to know what to avoid as what to seek. In the case of the for-profit educational stocks, knowing what to avoid was critical over the past year.

One example, that is reasonably representative of the sector, is

Apollo Group


. It is a for-profit education company that manages educational services primarily through

Phoenix University

. The charts have been devastated.

Here's a weekly chart that had telling signs that something was amiss. Even if you might have stumbled on this stock, understanding what the chart tells you can keep you from repeating the same mistake down the road.

The first warning that there were real problems with this stock came back on the last week of March 2009. Notice the wide price spread on that bar and the huge volume expansion. When you see that type of action on a chart, the stock is trying to tell you that it has huge problems inside of it.

The first time it occurs, you typically see the stock try to make it all the way back to the highs of that bar and that is what Apollo did. Then the next shoe drops. If you are stuck in a stock like this after the first downdraft, you can give it a day or so to see if it begins to recover and if it does, then look for the nearest exit as it works back higher. The market usually gives you and out but in a stock like this, it only gives one.

So where might a buy be on Apollo? Turn your attention to the monthly chart. There are two bars that are really the last gasp to save this stock. The first is being tested on a monthly basis currently. Volume is larger than that swing point low already and the month isn't quite done. What that means is that even if the close for this month ends up being higher than that low, I would not touch the stock because the low was being pushed with volume expansion.

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Wait for it to retest with lighter volume first. If it fails to successfully test this higher swing point low, then wait and let it test the lower one. What you need is a test of a swing point low on lighter volume and you need for the test to fail (it cannot break the swing point). That is the only way you can know that the selling is probably done.

Once a successful test occurs on the monthly chart, then observe the daily chart to see some sort of sign of strength -- a situation where the buyers come in and squeeze all these short sellers. You will know because volume will expand and the price spread on the bar will be great. Once that happens, allow the stock to go back to test the bottom of the bar that showed strength. If it comes back into the low of the bar and volume shrinks, then that is when you can take a position on the notion that the selling really is done.

Right now there is nothing to do with any of these stocks other than to stay out of the way and observe. At some point the selling will be complete and by carefully watching the price and volume action you can gauge an entry point that gives you a low-risk entry. If you are patient, eventually this sector and this stock will offer up some great longer term buys but until then you have to be very patient.

Until next week, just keep trading the charts!

At the time of publication, Little had no position on the stock mentioned in this article.

L.A. Little, author, professional trader and money manager, writes daily on

, a free educational site for traders and investors. He has been featured in numerous publications and is the author of

Trade Like The Little Guy


His background includes degrees in philosophy, computer science, computer information systems and telecommunications. With a trading philosophy centered on capital protection first and the accumulation of consistent gains over time, L.A. espouses a simplistic technical approach to trading the markets that is a throwback to the days of past. With a focus on swing points and the qualification of trends, L.A. provides a breath of fresh air to an otherwise crowded room of derivative indicators with the emphasis on technical minutiae.