One of the technical patterns that signals that a stock is likely to decline is a double-top formation. That's the situation currently in PRG-Schultz ( PRGX), a business-services company that provides audits for medium-sized and large companies.

Beginning in September 2006, the stock displayed strong price appreciation, climbing from around $2.50 to $16.70 in March 2007. In addition, when price moved to the $16.70 level, volume increased dramatically relative to the average daily volume.

This type of high-volume move usually denotes an exhaustion point as buyers use up the majority of their capital to push the price higher. The retail trading crowd also becomes more active, which indicates that stronger resistance could be at hand. After hitting the $16.70 resistance level, shares of PRG-Schultz retreated back to $13 before running up prior to the company's earnings release on May 14.

The run-up to earnings pushed the price to former resistance at $16.70. Also, the move back up to the resistance level was again marked by an increase in volume. But after that exhaustion point repeated itself, volume and buy-side interest waned.

This is good news for the bears, however. Typically when there is an exhaustion point at a former resistance level -- which we can see in PRG-Schultz by its vertical price movement combined with an increase in volume -- the double-top formation leads to lower prices at least one more time.

As the chart below shows, PRG-Schultz seems to be forming such a double top. Thus shares have a higher probability of revisiting their former support level at $13 rather than continuing to climb.

The ideal entry strategy for this short trade would be to see the current base that is forming between $15.50 and $16.50 lead to a break of this current support area. If the share price breaks below $15.50, entry should be taken at this level on a tick back up, with a stop placed at $16.75. This would offer $1.25 in risk.


PRG-Schultz (PRGX) -- Daily


The profit target would be $13, which would offer $2.50 in profit. This sets up a 2-to-1 reward/risk ratio.

If the price of the stock should break above $16.50 without first offering an entry, this trade setup is no longer valid. Shares closed at $16.34 Tuesday.

Update on Previous Pick

  • Beacon Roofing Supply (BECN) did not set up last week; its share price missed the entry point of $18.50 by 30 cents before falling back down to $17. If the price hits $18.50, providing an entry, the stop should be placed at $20.10. The first profit would be at $16.90, with a final profit target at $12.75.

    If the share price closes under $15 without first offering the entry, this trade setup is no longer valid. The stock closed at $17.78 Tuesday.

Please note that due to factors including low market capitalization and/or insufficient public float, we consider PRG-Schultz to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

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.

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