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TRADING SYSTEMS


Quanta Services And A Bearish Breakaway Gap

05/05/11 08:38:35 AM
by Donald W. Pendergast, Jr.

Breakaway gaps are high-profile events that can help a trader determine the likelihood of a confirmed, sustained trend move in any given stock or commodity.

Security:   PWR
Position:   Sell

Wow, did the broad market do a quick turnaround over the past couple of sessions! There are a ton of fresh Rahul Mohindar oscillator (RMO) swing sell signals across all market sectors, and more than a few issues are turning down hard. Here's a look at a Standard & Poor's 500 component that is dropping faster than the broad market as a whole (Figure 1).

FIGURE 1: PWR, DAILY. A powerful bearish breakaway gap on wide range, weak money flow, and poor relative strength versus the .SPX all seem to suggest that going short on this latest RMO swing sell signal might be a relatively sane thing to do.
Graphic provided by: MetaStock.
Graphic provided by: Rahul Mohindar RMO indicator from MetaStock 11.
 
Shares of Quanta Services (PWR) had been weak since late February, but with the advent of Wednesday's bearish breakaway gap and a wide-range RMO swing sell signal, the stock is now officially in the bearish camp -- perhaps for some time to come.

If we look at the big picture in the broad US markets, we already know that the seasonal charts suggest that the best part of the typical "first-half" rally is likely behind us and that it would not be unusual to see some sort of a pullback into the summer before another year-end rally erupts. If the last couple of days' worth of RMO swing sell signal output is any indication, the market is definitely on the cusp of a significant correction back toward key support levels. And in the case of PWR, a stock that is dreadfully weak versus the .SPX over the past 13 weeks, this stock look like it's ready to test, if not exceed any number of key support levels over the next few weeks. Money flow is very weak, as evidenced by the Chaikin money flow (CMF)(34) indicator at the bottom of the chart, and for all intents and purposes, this looks like a very strong, very rational sell signal.

Perhaps the simplest way to play PWR here is to wait for a meaningful intraday pullback toward resistance on a 15- to 30-minute chart, putting on half of your position there. Then wait for Wednesday's low of $18.87 to be taken out before adding on the second half. Once filled, manage the position with a two- to three-bar trailing stop of the daily highs until final closeout, no matter what happens. If we truly are on the verge of a substantial corrective decline in the .SPX, this could be a gret stock position to take right about now 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: lineartradingsys@gmail.com

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