It looks like the bears are donning their Panama hats and heading south aboard Copa Holdings ( CPA - Get Report). The company is the parent of Copa Airlines, which is based in Panama and services the Americas and Caribbean. It's also the parent company of AeroRepublica, a domestic carrier in Colombia.

After Copa announced positive earnings last week relative to the rebound taking place in the airline sector, the airline's share price could not resume an uptrend confirmation signal. Instead, the price remained in the range between $50 and $57.50.

This range happens to be the right shoulder of a head-and-shoulders technical formation. This type of pattern tends to be bearish and has a higher probability of leading to a break of supports and a test of former lows than producing an upward move.

A head-and-shoulders technical pattern forms when a stock price congests between some range-extreme levels for a period of a couple of weeks to a couple of months. This action forms the left shoulder of the formation. Then price breaks the left shoulder-range resistance and moves higher, forming the head of the technical pattern.

Then price is rejected with strong distribution pressure, which pushes the price back to the former left shoulder range, where it begins to form the right shoulder. The final phase of the bearish behavior occurs when the right shoulder support level fails to hold, and price moves lower to test former supports.

For Copa, the range in the right shoulder is defined by last week's trading between $50 and $57.50. The ideal bearish setup requires that the price stays under $57.50, and the confirmation of this short trade setup would be to see a close under $50 a share.

If Copa's stock price closes under $50, the strategy is to look for a return to $50 for an entry. Once the trade is entered, the stop would be placed initially at $55, offering $5 in risk.


Copa Holdings (CPA) -- Daily


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 for this trade would be $42.50.

Note that because of the wider stop, the position size needs to be adjusted accordingly for your risk tolerance. Do not trade the same number of shares that you would trade if the stop were only $2 above the entry price.

If the share price closes under $50 but then moves below $49.25 without first offering an entry, this trade setup is no longer valid. Also, if the price moves above $57.50 without first closing under $50, this bearish setup is no longer valid.

Shares of Copa closed at $57.09 Monday.

Updates on Previous Picks

Three of my short ideas remain open, and all of them continue to work lower. Here's a quick rundown of these setups.

  • 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 $35.02 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. The stock closed at $21.40 Monday.
  • PetMed Express (PETS - Get Report) set up with an entry at $12.80. The stop at $14.25 offers $1.45 in risk. So the first profit target is at $11.35 to satisfy the 1-to-1 reward/risk ratio. Partial or full profits could be taken there. If partial profits are booked, the stop can be lowered to $13, and the final profit target would be the September lows of $9.50. Shares closed at $12.01 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 TheStreet.com 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; click here to send him an email.