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Newpark Resources Retest Of Plunge Low Likely

12/08/10 08:54:11 AM
by Donald W. Pendergast, Jr.

When a former high-flying stock crashes and burns, the probabilities lean toward further selling pressure after a minor bounce toward resistance.

Security:   NR
Position:   N/A

The energy services industry group has been humming right along, with many of the big names like Halliburton (HAL), Baker Hughes (BHI), and National Oilwell Varco (NOV) making very nice gains since last July. In this article, I will address a possible short sale opportunity in one of the lesser-known names in that industry group, Newpark Resources (NR), a stock that is now severely lagging the rest of its peer group -- especially after suffering a 45% selloff between late September and early November 2010. Figure 1 is a closer look.

FIGURE 1: NR, DAILY. Shock market selloffs, the type with breakaway and/or continuation gaps leading the way lower, rarely seem to rebound to the former highs very quickly. If the broad market stalls or pulls back over the next week or so, expect to see NR attempt a retest of its last swing low at $5.42.
Graphic provided by: MetaStock.
No uptrend lasts forever, and after shares of Newpark Resources managed to appreciate by an astonishing 240% between November 30, 2009, and September 20, 2010, more than a few previously satisfied shareholders decided to get out while the getting was good, thus precipitating a calamitous decline from $9.50 all the way to $5.12 in less than six weeks. A gigantic open gap (a continuation gap) was established on the way down, a bearish omen for this stock.

After putting in a tentative bottoming pattern, which was followed by a rebound toward the Fibonacci 23.6% retracement of the panic sell move, the stock has now given signs that a daily cycle high has been made. Given that a reasonably legible three-wave impulse series of Elliott waves has already printed, any further down force toward $5.42 (the last minor swing low) would seem to imply that wave 4 is a done deal, with the possibility of a more substantial wave 5 waiting in the wings to complete the final flushout of shorts and weak longs from this particular market.

Here's how you may wish to play this setup:

Set a sell-stop order for two ticks below Monday's low (near $6.03) and then, if filled immediately, place a buy-stop (GTC) a couple of ticks above Tuesday's high (near $6.34). Consider running a two-bar trailing stop of the daily highs until either stopped out or the initial price target of $5.42 is hit.

The risk-reward ratio for such a setup comes in at about 1.95 to 1, which is more than acceptable, provided you keep your account risk at 1% or less on such a speculative stock play.

While December is generally a very bullish month for the broad markets, we could still see some weakness over the next week or so before the markets attempt to reach even higher levels. Any widespread market weakness should have immense benefit for this short setup in NR, so be sure to keep a close eye on the big market picture if you do decide to take a shot at trading NR on the short side.

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:

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