2 stocks ready to fall

samsonStocks are very much like people in that they have a ‘circle of life’. Like winter and summer, death and birth, stocks rise and fall in a pattern of eerie repetition, which isn’t surprising when you consider that stock prices are really just a function of human (buying and selling) whims and emotions.

Learn to spot this cycle, whether a stock is in its ‘winter’ or ‘summer’, and you have a big picture view of what’s going on, and whether you’re sitting on a goldmine or a time bomb in your portfolio.

Today I’m going to show you two stocks where ‘summer’ seems to be over. If you own these stocks or were thinking about buying them, you might want to think again. Better still, you might want to make money from their imminent ‘winter’…

Here are two stocks in completely different industries, and yet their charts are so similar when you look at the moving average (curved blue line) and the pattern of the stock price in relation to it.

First the home builder, Toll Bros:

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The straight blue line I drew here is a long term, and very well defined, line of price support. If TOL breaks below $30 decisively, look out below. I also drew a line in bottom right to show how volume is contracting, so it shouldn’t be too long. Moreover, this classic ‘life-cycle’ pattern is in ‘late fall’. ‘Winter’ seems to be imminent. TOL’s ‘summer’ began in November 2011 and ended in October 2012. It’s now flirting with the long term moving average (curvy blue line) which is also starting to head down, another classic sign of ‘winter’ approaching.

Next, Expedia:


(source: stockcharts.com)

Does this chart look familiar?

Yes, it’s almost a carbon copy of TOL, and illustrates my point about repetition nicely. Everything as before, only EXPE is closer to ‘winter’ because it has actually broken through support at $50 (notice how support is often in round numbers?). It’s currently staging a textbook pullback to the old support line, and its test will be if it can get back above it. But, like TOL, history isn’t on its side, nor is the chart, nor is gravity for that matter.

But after winter comes spring. Rinse and repeat. Be on the right side of these swings and you can make a lot of money. But if you’re on the wrong side of the prevailing season, you’ll lose. Winter always has some sunny days, and you can briefly enjoy those, but you don’t get the grill out, do you?

Remember, whatever the ‘season’, traders can make money. Just know your ‘stock seasons’…!

Best,

Jim.

 

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