Copart Forms An Ominous Wedge

07/24/08 10:35:12 AM

by Arthur Hill

After a sharp decline in June, Copart bounced in July and hit a key retracement zone that could spell the end of the bounce.

Security: CPRT
Position: Sell

Figure 1 shows Copart (CPRT) over the last five months. The stock hit a new 52-week high in June and then suddenly fell sharply at the end of the month. This high-volume decline found support near the April lows and the 200-day moving average.

FIGURE 1: CPRT, DAILY. The stock hit a new 52-week high in June and then fell sharply at the end of the month.

Graphic provided by: TeleChart2007.

The July bounce recovered some of the losses, but the stock is entering a key retracement area and an ominous rising wedge formed. First, the advance retraced 50%–62% of the prior decline. This is typical for countertrend rallies. Second, the rising wedge is also typical for countertrend rallies. The wedge is still rising, however, and it would take a break below 42.5 to reverse this rise. Once broken, the April–July lows would mark the first target and the March low would mark the second target.

The bottom indicator on Figure 1 shows the moving average convergence/divergence (MACD) (5,35,5). Traditionally, MACD is the nine-day exponential moving average (EMA) less the 26-day EMA. A nine-day EMA is applied to this difference for a signal line. To speed up the indicator, I shortened the first EMA, lengthened the second EMA, and shortened the signal line EMA. This makes the indicator more sensitive and creates more signals. Look for a move below the signal line to turn momentum bearish.

FIGURE 2: CPRT, DAILY. Here's the stock with the OBV and volume bars.

Graphic provided by: TeleChart2007.

Figure 2 shows the stock with the on-balance volume (OBV) and volume bars. Selling pressure was intense during June and OBV moved below its March–May lows. Volume is leading the price lower, and this is bearish. In addition, note that OBV did not move higher during the July bounce. Upside volume was not strong during the bounce, and this suggests that the bounce will fail.

Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

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Copart Forms An Ominous Wedge

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