I can remember when demand for shares of Priceline Group (NASDAQ: PCLN) was so great that it pushed its market capitalization above that of the entire airline industry it served. Those bubble days are long gone, and the stock looks to have a long way to fall before getting its wings again.
PCLN has been no slouch over the past year. Exploding out of a trading range in May 2013, it ran from roughly $716 to a high near $1,379 earlier this year. Not too shabby. However, since then, it has been falling more than rising, leaving a failed intra-year recovery in its wake.
As we can see in the chart, PCLN peaked in March, along with the broader market. But unlike the major indices, the stock was unable to regain in the summer what it lost in the spring. A failure to reach its prior high is a warning sign, especially when the market was successful in its recovery.
Next, cumulative or on-balance volume peaked along with prices in March, and it has been setting lower lows ever since. This indicator keeps a running tab of volume on up days minus volume on down days. Rising on-balance volume shows demand for a stock, with the idea being bulls are more aggressive when prices rise and therefore buy more shares on those days than on pullbacks or resting days.
Priceline's cumulative volume fell for most of the time from May through August as prices attempted to move higher. Chart watchers call that a negative divergence, and it suggests supply is beating demand. That, of course, is not good.
The battle really ended last week when the stock moved below the rising trendline drawn from the May low. Momentum is now on the side of the bears, and heavier volume following the break confirms that the tide has turned.
If PCLN falls that low, it will complete what can be called a distorted head-and-shoulders top going back to November. But that is pushing the envelope in my view, and I'd prefer just to call it a trading range with support at $1,105.
If that range breaks, the next target could be in the $900 area, which is the downside projection of the range height, and roughly 25% below current prices.
It sounds like an unreasonable move, but in the context of the huge bull market this stock has enjoyed, it is possible. Starting at the major 2008 low, it would be approximately a 50% retracement of the entire bull run. But for starters, we'll focus on a more conservative target of a 9% decline.
Recommended Trade Setup:
-- Sell PCLN short at the market price
-- Set stop-loss at $1,380
-- Set initial price target at $1,105 for a potential 9% gain in six weeks
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This article originally appeared on ProfitableTrading.com: Look Out: This Wall Street Darling May Be In For A Huge Drop