Potential Triple Top in This Stock Screams ‘Short Sale’

After a multi-year bull market, the S&P 500 looks ripe for an important correction. During the July 21 trading week, the index hit an all-time high just above 1,991. Now, two trading weeks later, it has dropped almost 4.3% to 1,909. More importantly, it has broken a three-year major uptrend line in the process.

The break of this major uptrend line — which dates back to October 2011 — is highly significant and is potentially a very profitable signal for you as a trader to recognize.

A broken major trendline shows a reversal in trading psychology and illustrates investors are more interested in selling than buying.

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One stock that looks like it could be particularly vulnerable is America’s largest tire manufacturer, Goodyear Tire (NASDAQ: GT). Within the past two weeks, GT has broken a major uptrend line dating back to April 2013, and it has the weak fundamental outlook to back it up.

On July 30, the company reported disappointing second-quarter results. Despite posting record earnings for the period, revenues were weak. Sales slumped in three out of four of the company’s major operating segments.

In North America, the tire manufacturer’s largest market, sales fell 7% for the quarter, with original equipment volume declining 4%.

The picture was grimmer in Latin America. Sales for the period dropped 8% from the year-earlier quarter. Original equipment unit volume plummeted 33%, primarily because of weakness in Brazil.

In the Asia-Pacific region, sales for the period fell 7% despite original equipment volume increasing 6%.

From a technical perspective, the stock appears vulnerable. Having broken the major uptrend line, the stock is approaching important support in a small zone which ranges from low $22s to high $23s.

If this support zone is broken, there is some marginal support in the vicinity of $19. More significant support would not be reached until the shares declined to the $15 range, a multi-month basing area completed in the early summer of 2013.

Major overhead resistance is just above $28. Three times this past year — in February, April and July — shares popped just above $28, then quickly retreated to the low $20s.

A triple top, a major reversal pattern, may be building. A break of $23.74 support would confirm pattern.

The measuring principle for this pattern is calculated by subtracting the height of the pattern from the breakdown level. In GT’s case, our target is $18.84 ($28.64 – $23.74 = $4.90; $23.74 – $4.90 = $18.84), slightly below the October 2013 spike low of $19.67.

The bearish technical picture is supported by weak fundamentals. Despite management’s focus on expanding into emerging markets, analysts expect upcoming revenue to marginally fall.

For the third quarter, analysts anticipate weak tire demand will push revenue 0.8% lower to $4.96 billion from $5 billion in the comparable year-earlier period.

For the full 2014 year, analysts project continued softness in emerging markets will cause revenue to fall 3.4% to $18.9 billion from $19.5 billion in 2013.

The earnings outlook is less negative.

For the third quarter, analysts expect earnings will increase 4% to $0.71 per share from $0.68 per share in the comparable year-earlier period.

For the full 2014 year, analysts anticipate earnings will rise 9% to $2.86 per share from $2.63 per share.

Risks to consider: The global tire market is forecast to expand 4.7%, to 3.3 billion units, by 2015. Negative currency fluctuations in Latin America may, however, put a damper on future profits. However, I am convinced that the break of the major uptrend line in GT has signaled an important change of direction in the stock. Cautious traders may wish to wait until key support at $22.24 is broken. However, more aggressive traders should short the shares at Friday’s opening.

Recommended Trade Setup:

— Short GT shares at market prices on Friday, Aug. 8
— Set stop-loss at $28.66, slightly above important resistance marked by the peak of the potential triple top
— Set price target at $18.84 for a potential 22% gain by late 2014

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