When Stocks Breakdown: Four Case Studies

The ability to recognize shifts in market sentiment and momentum through price action analysis is an essential characteristic of a skilled trader and investor. This talent is not born over night.

In fact, it can take weeks or months of watching a stock closely to acquire a familiarity with its fluctuations over various time frames and develop the eye to discern key changes in price.

It must be emphasized that stocks trade both up and down, and that we can make money in either direction:

  1. By entering a long position, we profit by buying a stock at a low price and selling it at a higher price. We only make money if the stock price rises (bullish bias).
  2. By entering a short position, we profit by selling a stock at a high price and buying it back at a lower price. We only make money if the stock price falls (bearish bias).
The problem with short selling is it’s still not particularly well accepted as an American way of investing.
— Bill Ackman, Hedge Fund Manager, in a Reuters Impact Players Interview on 4/8/2013

Most people are familiar with betting on a rise in stock prices and thus going long, as this is what is traditionally presented as the primary way to make money in the market. Going short is not as well understood, in part due to the stigma associated with it as well as the lack of education about it.

Let's take a look at some examples of stocks we've highlighted recently and a few new ones which all share one thing in common: notable breakdowns in price that traders with a preference for entering and profiting from short positions can learn from.

$Z : Zillow Inc. ; $BITA : Bitauto Holdings LTD ; $NBG : National Bank of Greece ; $AMD : Advanced Micro Devices

1. Zillow Inc. (NASDAQ: Z)

In our last post about Z on 9/27/14, we noted that the stock's close below its multi-week support level at $123 on Friday,  9/26/14, was a significant price breakdown in favor of the bears. On 9/26/14, Z closed at just under $122 a share.

In the two weeks that followed, the bears have completely run over the bulls, with the stock falling nearly $20 a share. It closed Friday, 10/10/14, at $104.79.

Let's watch to see if $100 holds as a support level on any continued selling pressure.

2. Bitauto Holdings Limited (NYSE: BITA)

We last wrote about BITA on 8/20/14 and brought attention to the stock's incredible summer climax run from the low $40s. At the time, BITA had traded as high as $85 a share.

The stock went on to trade even higher, reaching its pinnacle of $98.28 the week of 8/25/14. The high $70s provided support for the bulls on subsequent pullbacks in price until the beginning of October, when BITA closed at just under $75 a share on Friday, 10/3/14.

In the week that followed, BITA pulled back further. It closed Friday, 10/10/14, at $64.10. We will be watching to see if the high $50s hold as a support level on any continued move lower.

3. National Bank of Greece (NYSE: NBG)

On 10/7/14, we issued a twitter alert on NBG, noting its break below long-term support at $3 on Friday, 10/3/14, when it closed at $2.86 a share. Although the stock had tested the $3 level several times since late 2013, it had never closed below it on the weekly time frame.

By the close of trading on 10/10/14, NBG had fallen to $2.68. It had traded as low as $2.55 earlier that week. The stock is now in uncharted territory and we can thus make no determination on what the next support level may be.

4. Advanced Micro Devices (NYSE: AMD)

Since May 2013, AMD has traded above $3 a share. Last week it traded below $3 and closed Friday, 10/10/14, at $2.72 a share. This is an important breakdown in price as the bulls failed to support the stock from the onslaught of heavy selling pressure.

If the bulls are unable to regroup, it would not surprise us in the least to see a further pullback in price. Support currently seems to be in the mid $2s, going back to late 2012/early 2013.