It's so easy to pick on a stock when it's down and
has definitely been down. Having dropped to a low of $37.32 from almost $55 certainly fits the bill of being down. But it's not where it was or has been but where it's going that you want to know about.
Looking at the charts, they tell me that Hewlett-Packard, at best, will be in a large consolidation pattern. At worst, it's heading back to the lows it made in August. Let's look through the charts to see why.
I'll start with intermediate-term time frame because it is very easy to see the qualified trend there.
On this chart, notice that each time the swing points broke volume expanded telling you the trend was confirmed. First it moved from an uptrend to a sideways trend. From there, it broke the "flash crash" swing point low and finally confirmed a bearish trend.
The most important thing to ask is what does the stock have to do to change the trend. To make that happen, it needs to break a swing point high. The closest one is at the $48 price point, but I don't expect that to happen anytime soon. Given this, you can expect Hewlett-Packard to remain in a trading range with a downward bias. I say trading range because of the amount of damage that already has occurred took place very quickly. If the stock intends to take out the recent lows, it will need time to build enough strength.
One last thing to consider is that when you get this kind of downdraft odds are there are plenty of sellers up above now. Just look at how many positions are underwater at this point. Everything other than the last month of trading is in a losing position and hoping to get out at better prices. That's a lot of supply that will continue to pressure the stock for some time to come.
If I pull the chart back to a monthly long-term time frame, you can see the volume characteristics of the downdraft.
It is huge and, what's worse, is untested now on this time frame. That tells me that at some point over the next several months Hewlett-Packard will trade back to the lows. If this is true, I wouldn't want to be a buyer. The support zone on this chart is the highs from the low bar of March 2009 back to the lows of the high volume anchor bar from October 2008.
Finally, if you look at the daily chart for entry and exit timing, the stock has just entered into the resistance zone.
I would expect selling to pick up soon. It could trade up to $44 but that's probably about it for now. The support zone is a fill of the gap back at $40.67.
If I owned Hewlett-Packard for the long term, I would look to trade around the position since the odds of it running away from you (moving higher) are quite low. I would lighten up and trade around the position -- selling into resistance and buying back at support. That's a way to improve your cost basis. The odds of this stock moving past $48 anytime soon are next to nothing in my estimation. If you want to trade it, trade it from the short side into resistance. In this particular case, I would wait for it to get close to $44 and then pull the trigger on the short sale.
Until next time, just keep trading the charts!
At the time of publication, Little had no position in the stock mentioned, though positions can change at any time.
L.A. Little, author, professional trader and money manager, writes daily on
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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.