|Petco (PETC) recently formed a classic double top chart pattern. It hit a high of $35.85, retreated to $29.59 after which it mounted a new topside attempt. This second move made it to $34.19 before failing and gapping lower. It then broke the neckline and looked to be moving to the downside target projected by the pattern of $23.30, right? But before we pull the trigger, let's take a closer look.|
|Figure 1 – Daily chart of Petco Animal Supplies showing classic double top with neckline at $29.59 and target of $23.30. The green horizontal lines show that support will have to be broken to reach the target. Chart provided by www.highgrowthstock.com Data by www.Quotes-Plus.com|
|In a heads up from Recognia.com about a double top chart pattern that had just formed on the stock, I decided to do a little more homework. A quick check of the fundamentals showed why shorting this stock and then waiting for the target to be hit no longer seemed like such a hot idea. |
First the P/E ratio at 23.7 was not all that high. For a short, I'd rather see either negative earnings or a sky-high P/E of 50 plus. Next, the earnings showed a good sequential growth rate of anywhere from 27% to 47% growth in the last four quarters. Short interest is roughly just 1% of float, well below my acceptable threshold of 5% or better to short. Insiders had sold 761,800 shares in the last three months and the price-to-book value per share was just $0.56. However, all but of the ten institutions that held the stock were buying as were most of the mutual fund companies. At a price of $28.16, it was already getting close to the first level of support at $27.15. Other than the pattern, some insider selling and a low book value, there were not a lot of good reasons to sell.
Since the fundamentals for the most part showed a strong company and strong companies make poor short candidates, I took a pass. While it may eventually hit the price target given by the double top, it would take either a major market melt or some exceptionally bad news to do so, making the trade more of a gamble. Petco looked like a better stock to put on watch list and buy at support at either $27.00 or at $25.00 if the first support line was broken on the first sign of strength.
|There are traders who don't check the fundamentals, but for the five minutes it takes, those who do could save themselves a world of pain waiting for a target that has a high probability of not being reached.|
O'Neil, William  How to Make Money in Stocks, McGraw-Hill
Using technicals and fundamentals together
Price and fundamental data available
Some great information on identifying chart patterns
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