Avon Products Weak Despite Strong Market Rebound

07/12/11 08:33:49 AM

by Donald W. Pendergast, Jr.

After a market has a strong rebound rally, it might pay to be alert to those stocks that are lagging behind.

Security: AVP
Position: N/A

We've just witnessed a very powerful rebound rally in the mighty Standard & Poor's 500 during the past three weeks, with the index now within spitting distance of the June 1, 2011 high mark of 1,345.20. While it's certainly possible for the .SPX to reach and/or exceed that resistance area within a short period of time, it also behooves traders and investors to take the larger market picture into account, that being an enduring intermediate-term top has already been established (1,370.58 on May 2, 2011), and this recent upsurge is just a technical relief rally before a larger scale decline sets in. If that is to occur soon, it would be a great idea to keep a watchlist of poor comparative relative strength stocks that are giving strong system sell signals. Here's a look at one such stock right now. See Figure 1.

FIGURE 1: AVP, DAILY. That shelf of support near $27 could be the real make-or-break point for shares of AVP in the near term, depending on the broad market action at the time.

Graphic provided by: MetaStock.

Graphic provided by: Rahul Mohindar (RMO) from MetaStock 11.

Shares of Avon Products (AVP) have been very weak versus the .SPX ever since AVP topped out at $36.20 on October 12, 2011; in the nine months since then, AVP has shed more than 24% of its value even as the .SPX has managed to increase by a very respectable 14+%. Clearly, the big institutional money isn't all that fond of keeping too much of their mutual fund cash invested in AVP; it's not exactly a beauty queen of a stock in their eyes, apparently. The daily chart layout for AVP does look a bit haggard, and its makeup looks a bit messed up, technically speaking.

Standing back and looking at this chart in as objective a mindset as possible, it certainly looks as if one of two outcomes may be in the works for AVP here; the first likely setup is that the stock is forming a bottom, complete with a mildly bullish money flow divergence. The second and more likely pathway for this stock to traverse is that as the broad market stumbles and tumbles that AVP will get sucked lower, easily smashing through that powerful support level near $27 in the ensuing downdraft.

The reason for feeling more strongly about the second outcome is mostly due to the new Rahul Mohindar oscillator (RMO) swing sell signal (green oval area on chart) happening to fire as a period of such negative momentum and money flow readings in the stock. In addition, the stock is sitting just above that previously mentioned major shelf of support at $27 or so; support areas like this are natural market magnets that almost invariably seem to draw prices close to force a retest and/or breach of such key support & resistance levels.

Going short a stock is certainly not an activity for new or nervous traders, especially if they don't have a well-thought-out trading plan and/or successful trading system at their side, but if you are a skilled trader you may still want to take a shot at AVP on the short side. Placing your initial stop just beyond the recent swing high (a little above $20.15 should do it) after going short on a break below $27.37 might be one way to get the ball rolling here, but you must trail the position closely to avoid getting slammed on a possible short-covering rally if $27 actually does hold steady. This might be a great setup for skilled intraday traders, too -- just use $27 as your profit target and size your positions accordingly to avoid taking on too much risk.

As far as taking the "buy put options" route goes, it's not a good idea in the case of AVP -- the bid-ask spreads are uncomfortably wide and are really not worthy of a serious trader's consideration at this point. Sticking with the short-stock plan is likely the best way for nimble short-sellers in AVP right now.

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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Avon Products Weak Despite Strong Market Rebound

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