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 ( ARLP - Get Report), 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 Note that if the stock price should move under $33.50 without first offering an entry, this trade setup is no longer valid.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.