This Blue-Chip Stock's Price Is Set To Plummet Quickly

Thursday, March 5, 2015 - 7:30am

by Michael Kahn

Some chart patterns are pauses that will eventually resolve in the direction of the preceding trend. Some are pauses that signal a change in trend. The trick is to wait for the market to tell us which it is before we act.

To be sure, most patterns can go either way. That makes waiting for the breakout/breakdown a critical step, because even a pattern with a bullish name, such as an ascending triangle, can lose to the bears. 

Right now, consumer products giant and member of the blue-chip Dow 30, Procter & Gamble (NYSE: PG), offers such a setup. 

Not only does it sport a very clear symmetrical triangle pattern, but it is now trading between trendline and moving average support and resistance levels. Indeed, it is at a crossroads with both long- and short-term implications (although today's trade will be limited to the short term).

PG Stock Chart

As we can see in the chart, PG recently broke down sharply below the short-term rising trendline from July. However, it is also sitting just above a long-term trendline from the June 2012 bottom, which coincides with horizontal chart support from late last year.

In other words, the short-term decline targeted the long-term trendline, where the stock will have to make its next decision. Will it bounce and recover or break down? The latter turns a short-term decline into a long-term decline. 

On the moving average front, PG clearly dropped below its key short-term 50-day average. In fact, it spent so much time at lower levels that the average itself rolled over to head lower. It has been trading sideways right at its long-term 200-day average, so we essentially have the same setup as with the trendlines: A drop below the 200-day would turn a short-term decline into a long-term decline.

Because the two trends -- the short- and the long-term -- are at odds with each other, we need to consider more evidence. For that, we can turn to on-balance or cumulative volume, an indicator that keeps a running tally of volume traded on up days minus volume on down days. 

The theory is that more volume will change hands on up or down days depending on whether bulls or bears are more aggressive. Right now, on-balance volume is falling, even as prices move sideways, which suggests the bears are winning.

We want to wait for the actual breakdown to sell, but knowing the internal condition of the stock can help us decide how aggressive to be. With so many converging features on the chart, the odds favor the move to be quick.

Should PG dip below the lower border of the triangle at $84, we can project the height of the pattern down from the break point in integral multiples. The first is roughly $81.20. The second is roughly $78.50, which is also where major support from a series of lows in 2014 resides.

Recommended Trade Setup:

-- Sell PG short on a close at or below $84
-- Set stop-loss at $85.75
-- Set initial price target at $81.20 for a potential 3% gain in two weeks 
-- Set secondary target at $78.50 for a potential 7% gain in three weeks

Amplify Your Gains: Generate 140% From a 7% Stock Move

Using options, we can amplify PG's potential 7% move into a 140% gain. Specifically, we recommend buying PG Apr 87.50 Puts for $3.75 or less. 

This put option has a delta of 73, which means it will move roughly $0.73 for every dollar that PG moves, but it costs a fraction of the price of the stock.

The trade breaks even at $83.75 ($87.50 strike price minus $3.75 options premium), which is 1% below current prices.

If PG hits Michael's downside target of $78.50, the put options will be worth at least $9 ($87.50 strike price minus $78.50 target). Once you enter the trade, place a good 'til cancelled (GTC) order to sell your calls at that price.

Profit Amplifying Trade Setup:

-- Buy PG Apr 87.50 Puts for $3.75 or less
-- Set stop-loss at $3
-- Set price target at $9 for a potential 140% gain in six weeks

If learning how to make profit amplifying gains like this on your own interests you, we can't urge you enough to watch this interview. In it, one of America's top options traders reveals his strategy on camera for the first time. It's a technique that allowed him to retire wealthy at the age of 23 and continues to pay for his affluent lifestyle to this day.

Click here to watch the interview now.

-- Profitable Trading Staff

This article originally appeared on This Dow 30 Stock Looks Ready to Take a Quick Dive​

Michael Kahn 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.