Charts Say This Giant Stock Is Headed For A Swift Sell-Off

Friday, November 7, 2014 - 7:30am

by Serge Berger

Shares of online travel company Priceline Group (NASDAQ: PCLN) fell sharply on Tuesday, down 8.4% after the company reported better-than-expected third-quarter revenue and earnings but disappointed investors with its outlook. 

Sales jumped 25% year over year in Q3 to $2.84 billion, beating analysts' estimates for $2.83 billion. Adjusted earnings of $22.16 a share came in 28% higher than a year ago, easily topping expectations of $21.07.

But the stock took a beating on the company's guidance for the fourth quarter. Management forecasted 11% to 18% top-line growth and earnings of $9.40 to $10.10 a share excluding items. Analysts were expecting a much more robust 24% revenue increase and a $10.91 per-share profit. Priceline blamed the deterioration in European exchange rates, which it said is "indicative of weakening economic conditions in key markets."

On the charts, PCLN reversed down exactly where it should have from a technical perspective, and it now looks set to continue lower. Tuesday's gap down puts the wind at short sellers' backs, and further selling should provide quick profits.

Because of the sharp rally in 2013, I am using a weekly logarithmic chart to smooth out the price action over the years. Looking at the chart in this way shows that the move from June 2010 until this summer took place in an upsloping wedge, which is now being resolved lower. 

PCLN Stock Chart - Weekly

Momentum, as evidenced by the Relative Strength Index (RSI), topped in the second half of 2013, making lower highs while the stock price continued to ride. This is called a negative divergence. 

When it comes to divergences, momentum is often the better forecaster, as prices tend to follow it eventually. So in the case of PCLN, we can expect lower prices still.

While the weekly chart shows the bigger picture headwinds the stock faces, the daily chart below is where we find clear levels to trade around.

PCLN Stock Chart - Daily

First and foremost, note that the rally in February and early March took the stock vertical after an already steep move off the late 2012 lows. 

Shares then corrected 20% over the next two months, before bouncing off the rising 200-day simple moving average. 

In mid-August, PCLN made a lower high versus its early March top. This led to it slicing below its 200-day moving average, and in mid-October, the stock made a lower low compared with its early May bottom.

When the broader market rocketed higher in a "V" shaped reversal, PCLN did the same. But unlike the S&P 500, the stock made a lower high as it bumped into resistance at a crucial confluence zone around $1,210 to $1,220.

This resistance area is made up of the 100-day and 200-day moving averages, as well as the 61.8% Fibonacci retracement of the August-October sell-off. And it is exactly where PCLN gapped lower from on Tuesday after the earnings report.

Look for PCLN to fall through its mid-October lows over the next few weeks.

Recommended Trade Setup:

-- Sell PCLN short at $1,110 or lower
-- Set stop-loss at $1,160
-- Set initial price target at $1,010 for a potential 8%-9% gain in 3-5 weeks

This article originally appeared on ProfitableTrading.com: Charts Say This Giant Stock is Headed for a Swift Sell-off

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.