News Analysis date published New: 
Wednesday, February 6, 2013 - 16:00
New Date created: 
Tuesday, February 12, 2013 - 09:54
New Date last updated: 
Wednesday, February 6, 2013 - 16:00

This Overextended Stock Could Make Sellers a Quick Profit

Wednesday, February 06, 2013 4:00 PM

After a 40% rally off the November lows, Manpower (NYSE: MAN) gapped up and rallied another 6.7% on Jan. 30, taking its chart from a steep ascent to a vertical one. From a longer-term perspective, Manpower looks promising once these insanely overbought conditions subside in the near term. In the meantime, the stock is setting up for a high-probability, short-side swing trade for quick 6%-8% profits with very defined risk.

Before I make my case for shorting Manpower, let me be clear that this is a short-term trade. I would not advise betting against the stock in the longer term.

On the weekly chart, the stock formed a respectable higher low in 2011 and 2012 versus the 2009 lows. The higher low, however, has not yet been confirmed by a new higher high, which is another 33% away at the April 2011 highs.

As such, making a new higher high versus the April 2011 highs should not be the focus of analysis in the medium term. A more reasonable focus for when the stock has confirmed further longer-term technical strength would be a break past the downtrend line dating back to the highs from the summer of 2007.

My reason for concern regarding further upside in this stock's price in the near term is mostly related to the severely steep slope of the chart. Along with the broader market, Manpower found a solid bottom during the summer of 2012, and rallied hard into the end of the year. After an already steep slope into late January, where the stock retested its early 2012 highs, Manpower paused for one mere day before going vertical, rallying another almost 8% in three days.

The end result, which can be seen on the chart below, is a slope that during the past six months has become incrementally steeper. As a general rule of technical analysis, barring certain corporate finance activity or stocks in the pharmaceutical or biotechnology groups, the steeper a slope, the sharper an eventual mean-reverting move.

Before discussing potential stop-loss and profit target levels for this trade setup, let me point out the overbought conditions in the stock from a momentum point of view. After the massive run Manpower has displayed of late, one would expect momentum to be overbought, and it is as evidenced by the stochastics and Wilder's Relative Strength Index (RSI).

Keep in mind that this is a short-term swing trade. We are not yet seeing any negative divergence in the stock. In other words, price and momentum indicators have been rising in sync. As such, from a longer-term perspective, it is difficult to view current levels as a meaningful top.

Back to a chart focusing solely on price, Manpower's most recent breakout past the early April 2012 highs is one that, at the very least, should be retested before the long side can again be traded with better probability.

A first attempt at a short-side swing trade in the stock can be made at current levels given the overbought conditions and vertical slope in the chart. Due to the lack of any bearish candlestick chart developments, a tight 3% stop-loss order should be used. The logical price target is the April 2012 highs in the $47-$48 range.

Action to Take --> Sell MAN short at $51.20 or higher. Set stop-loss at $52.75. Set price target at $47-$48, for a potential 6%-8% gain in 3-4 weeks.

This article originally appeared on ProfitableTrading.com:
This Overextended Stock Could Make Sellers a Quick Profit

[Note: My colleague Amber Hestla-Barnhart of ProfitableTrading.com has just released a report that answers ten commonly-asked questions about boosting income with options. If you'd like learn more, click here.]

Serge Berger does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.