Technical analysis can be a fickle beast. No matter how good you get at reading charts and spotting patterns, your careful research can go right out the window in a moment if something major happens within the company. If a company reports a massive earnings beat or a CEO is arrested, the technical analysis is really going to go out the window. However, that doesn't mean that traders everywhere aren't watching for certain indicators that will make them suddenly bullish or bearish on a stock without any real change to that company's fundamentals.
Falling Wedge is a Sign a Breakout Could be Coming
One such pattern is a downward wedge or a falling wedge. Traditionally viewed as a strong trend, the falling wedge is often a sign that a stock is about to break out. The "wedge" pattern is formed when the trendline for support levels and resistance levels appear to be converging. Both are falling over time (hence the "falling" or "downward" element), but the resistance line is in steeper decline than the support line, so they appear to be set to cross each other at some point. The thing is, they don't, usually. The fact that the resistance line is falling at a steeper rate than support demonstrates that the downward price trend being pushed by the sellers is meeting support each time.
The ending for such a wedge pattern is typically a good one for those long in the stock, as the waning pressure from the sellers dissipates and the stock price usually breaks out past resistance. This is clearly not always the case, and, in fact, the exact opposite is occasionally what happens. However, buoyed by the fact that traders are watching for the pattern, a positive breakout is as likely as not. And it should be noted that many opt to play it safe and wait until the breakout begins before jumping on board rather than buying a stock already in a downtrend with no guarantee it will ultimately snap out of it.
So, here are five stocks that are currently in a falling wedge while also having an average analyst reccomendation of buy or better.
Acorda Therapeutics (ACOR)
Market Cap: $1.3 billion
Acorda Therapeutics is a commercial-stage biopharmaceutical company engaged in the development of therapies for neurological disorders, including multiple sclerosis and spinal cord injuries. The company's stock appeared to bounce off a double bottom in late July just to hit a double top in August and then again in early October.
Avanir Pharmaceuticals (AVNR)
Market Cap: $631.34 million
Avanir, like Acorda, makes treatments for diseases of the central nervous system. However, unlike Acorda's lengthy, gradual wedge pattern that can be traced back to April, Avanir's has formed abruptly just since early-to-mid September. What's more, it's much more pronounced, with resistance rapidly falling in that time.
AM Castle & Co (CAS)
Market Cap: $320.21 million
Stepping away from the biotech industry, AM Castle is a global specialty metals and plastics distribution company providing materials and services for a variety of industries including aerospace, oil & gas, mining, and manufacturing. AM Castle's falling wedge is not a pronounced one, with resistance falling only slightly faster than support. The company also saw resistance cross its 200-day moving average in late September as it shifted from a long uptrend that started on August 3 of 2012.
Market Cap: $8.24 billion
Tech company Equinix may give value investors fits with a P/E ratio north of 100, but its projected EPS growth over the next year exceeds 125 percent, so there's clearly reason for optimism. Equinix connects approximately 4,000 customers globally with its data centers. It also may have showed signs of breaking out just last week as the stock appeared to break resistance on Wednesday before spiking on Thursday and holding those gains on Friday, blowing past both resistance and its 50-day moving average in the process.
HD Supply Holdings (HDS)
Market Cap: $4.05 billion
HD Supply Holdings is an industrial distributor that supplies maintenance, repair, and operations products to facilities like hotels, hospitals, and apartment complexes. The company's shares only began trading on June 27, but the current downtrend that started in early September has all the hallmarks of a falling wedge. What's more, like Equinix, HD Supply may have already started its breakout, pushing past the resistance line in mid-November and even briefly kicking past its 200-day moving average this last Monday.