Generally, technical analysis says that a support level should break on the third test of that price area, providing a downtrend confirmation signal. But over the past six months, shares of Rohm & Haas ( ROH) have defied that adage.

The stock of this basic materials company has remained in a congestive range between $50 and $55 since October 2006. There was a small break above $55 in February after a euphoric phase, but distribution pressure quickly developed and pushed the price back to the $50 support level. The false breakdown at $50 in March signaled that the $50 level remains support for this stock. The retest of that level in April was successful, and buyers came in once again.

However, since October, there have been seven tests of the $50 level in Rohm & Haas. (Each of these tests is numbered on the chart below.) I haven't seen a situation like this in quite some time, where distribution pressure tries very hard to break support only to be thwarted by accumulation pressure.

The key aspect to the current price action is that buyers cannot take the price very high before the stock surrenders to distribution pressure again. Over the past several trading days, distribution pressure again appears to be stronger than accumulation pressure volume.

Rinse moves, like those we've seen in Rohm & Haas, typically take out weak positions before the stock returns to the range; these moves usually happen above or below key range levels. In the case of Rohm & Haas, the move above $55 in February served to rinse the short exposure that was building up between $50 and $53, creating short-covering, buy-side volume.

On the chart, you can see this by the volume spike in February, which was associated with the vertical price move higher. This spike illustrates the euphoria that normally exhausts an upside move. The result is a return to the range, as I mentioned earlier.

The combination of the stock's euphoric phase that failed to produce higher prices in February and the increased distribution volume over the past several trading sessions should create a test of the $50 support one more time.

Rohm & Haas (ROH) -- Daily

The ideal setup for this trade would be an entry at $53, with a stop at $55.50. This offers $2.50 in risk. The first profit target would be placed at $50.50 to serve the 1-to-1 reward/risk ratio. The final profit target will be determined if the price can close under $49.75.

If Rohm & Haas' share price moves under $50 without first offering an entry, this trade setup is no longer valid. The stock closed at $51.17 Monday.

Updates on Previous Picks

  • Christopher & Banks (CBK) did not set up last week. The entry strategy for this trade is to see price move back to $19.50, with a stop at $21.10. This offers $1.60 in risk. The first profit target would be placed at $17.90, which would satisfy the 1-to-1 reward/risk ratio. The second profit target would be $15.25.

    If the price closes under $16.90 without first offering an entry, this trade setup is no longer valid. Shares closed at $17.31 Monday.
  • PetMed Express (PETS - Get Report) is still open with the entry at $12.80. The stop should be lowered to break-even at $12.80. Partial profits were taken at $11.35, and the final target remains at $9.50. Shares closed at $11.03 Monday.
  • Take-Two Interactive Software (TTWO - Get Report) closed below $19.25 on Monday before offering an entry, and therefore it has been taken off the Watch List.

At the time of publication, Schumacher had no positions in stocks mentioned, although holdings can change at any time.

Chris Schumacher is a financial trader, speaker, writer and co-author of Techniques of Tape Reading. While Schumacher cannot offer specific investment or trading advice, he appreciates your feedback; click here to send him an email.