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VOLUME


FTEK Ready For Another Drop?

02/22/10 12:53:39 PM
by Donald W. Pendergast, Jr.

Down by 50% since October 2009, shares of FTEK have recently managed a feeble bounce higher. Is this stock bottoming out, or is this another chance at a low-risk short sale?

Security:   FTEK
Position:   Sell

Fuel Tek's (FTEK) common stock has been losing altitude for a while now, so much that it now boasts one of the worst relative strength rankings imaginable versus the Russell 2000. But even the strongest downtrends eventually let up (in most cases), permitting a battered stock the opportunity to recover at least a portion of its previous value. So what exactly is the deal with FTEK? Do the technicals and fundamentals warrant a short sale here, or should the bottom-fishers of the world monitor the stock for a potential double bottom/reversal pattern in the days and weeks to come?

FIGURE 1: FTEK, DAILY. Either it works or it doesn't, but a 2 to 1 risk-reward short setup in a weak relative strength stock with poor earnings growth potential doesn't seem to be overly risky at this juncture, especially with a short-term pullback due in the broad market indexes.
Graphic provided by: MetaStock.
 
Figure 1 is the daily chart for FTEK; the low on February 11, 2010, wasn't exactly the stuff that major capitulations are made of (if it had closed in the upper third of that day's daily range, it would have closed much more credibly), but the stock has still managed to rise by about a dollar per share. Favoring more downside is that FTEK has stalled well shy of its 21-day exponential moving average (EMA) along with its lackluster earnings growth potential over the next four quarters.

Of major interest is the agreement in the trends of both the positive volume index (PVI) and the negative volume index (NVI); when the trends are moving in the same direction (in this case, down), the probabilities favor trading the short side of the market in question. In case you aren't familiar with these volume indicators, all they do is alert you to periods when the stock rises or falls on either increasing (positive) or decreasing (negative) volume. They're a very valuable set of indicators for trend-followers and for those who attempt to trade major trend reversals. You can even overlay moving averages on them, looking for crossovers above and below the average, or simply look for trendline breaks. Not surprisingly, the PVI and NVI aren't particularly useful for short-term swing trading, so plan on using other volume-related tools in such cases.

As far as a simple way to short FTEK goes, here's one idea for you to consider:

Sell short on a break of Friday's low, near $6.13; if filled, place a buy-stop above Wednesday's high, near $6.53. Given the poor relative strength ranking and PVI/NVI configuration, try to hold on for a possible retest of the previous low at $5.27. Such a setup has a risk-to-reward ratio of better than 2 to 1, but if you see a wide-range reversal bar print once the trade is on, consider covering your short position as soon as possible and retreat to the safety of a flat market position.

Bear in mind that the Russell 2000 has risen for nine of the past 10 trading sessions, so don't be surprised to see at least a one-day broad market selloff manifest within the next session or two; this could be a real boon to any new short positions in FTEK.



Donald W. Pendergast, Jr.

Donald W. Pendergast is a financial markets consultant who offers specialized services to stock brokers and high net worth individuals who seek a better bottom line for their portfolios.

Title: Writer, market consultant
Company: Linear Trading Systems LLC
Jacksonville, FL 32217
Phone # for sales: 904-239-9564
E-mail address: lineartradingsys@gmail.com

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