Market Bellwether Just Pennies Away From a Breakdown

If the stock fails at critical support, the bears will be in full control and we can expect much lower prices. View Online | Print Version | Add to Address Book August 14, 2015 Market Bellwether Just Pennies Away From a Breakdown By Michael Kahn There are few stocks closer linked to the health of the economy than freight delivery and business services giant FedEx (NYSE: FDX). Because of where it sits in the economic food chain, its fortunes are closely tied to the performance of the economy -- and right now both seem to be sputtering. Keep in mind my frame of reference as a chart watcher. Fundamentally, the economy is chugging along at a slow speed and things such as low interest rates and low energy costs provide a good environment for growth. But the stock market, which looks months out into the future, seems to be anticipating problems. --Recommended Link-- Now Playing: How I've Sold Put Options With 100% Success If you'd like to remove your fear of options for good, you'll want to see this free webinar. In just eight minutes, Amber Hestla reveals how she's closed 85 straight winning trades -- and how you could do it too, starting this week. Click here to watch it now. --Recommended Link-- Average Annualized Gains of 144% -- Is It Possible? If annualized gains of 220%... 508%... even 2,201% seem too good to be true, click here. Sectors considered to be at the forefront of the economy, such as industrial metals, chemicals, steel and packaging products, are currently in bear markets. And transportation stocks have been lagging the broader market all year to suggest goods are not being moved to market at a healthy pace. This is a technical analyst's view of fundamentals and, thanks to the market's own forecasting ability, the changes appear here before they show up in earnings reports. FedEx has also lagged the market all year. In line with the Dow's recent death cross, which has filled financial headlines recently, FedEx also saw the ominous indicator appear on its chart. A death cross occurs when the shorter-term 50-day moving average crosses below the longer-term 200-day average. It is a good sign that the major trend has changed from up to down. It is a lagging indicator because moving averages rely on data from the past. So while it does not serve as a trade trigger on its own, it does tend to keep traders on the right side of the market for the bulk of a trend. The last time FDX's 50-day moving average was below the 200-day was in December 2012. That means following the upside crossover signal -- called a golden cross -- would have kept the trader long for the past two and a half years as the stock moved from roughly $90 to a peak of about $185 in June. Again, as a lagging indicator, it missed the first few points of the rally and did not fire a sell signal until the stock backed down about 20 points from its peak. Still, traders who followed these signals made an 80%-plus profit. Of course, this is just the big-picture indicator. Other indicators such as momentum and cumulative volume could have been used to refine the trade and keep more of the profit at its end. The point is that FedEx is in a very precarious position right now. Its sector -- the transports -- is in decline. Daily cumulative volume is falling and weekly momentum, specifically the relative strength index (RSI), sports a very clear bearish divergence with price action. Furthermore, prices have spent the better part of two months trading below the 200-day moving average, which is often taken as a sign by institutions that the stock is heading the wrong way. And there is even a bearish candlestick pattern called an evening star (not shown) at the June top with heavy volume during the sell-off phase. Right now, FDX is trading just above critical support at $163.50 where bulls bought the dip in December, March and July. But now is the first time shares are sitting there after breaking and then failing at the 200-day average. Should FDX trade below support again we can presume the bears are in full control and much lower prices are ahead. Based on the size of the trading range in place since October, the downside target is in the $143.50 area. That is where the stock formed a breakaway gap in June 2014 as it exploded higher from a consolidation pattern. Recommended Trade Setup: -- Sell FDX short below $163.50 -- Set stop-loss at $169 -- Set initial price target at $143.50 for a potential 12% gain in eight weeks Note: One of my colleagues just issued a bearish alert on another transportation stock, which he expects to fall 8%. But he has a plan to turn that move into a 35% profit by year end. And I have no doubt he'll do it. He's recently turned: -- A 5% drop in Wynn Resorts (NASDAQ: WYNN) into a 30% profit -- A 5% drop in Dillard's (NYSE: DDS) into a 41% profit -- An 8% drop in Alibaba (NYSE: BABA) into a 69% profit -- An 11% drop in Keurig Green Mountain (NASDAQ: GMCR) into a 34% profit -- And a 13% drop in Yelp (NYSE: YELP) into a 40% profit I urge you to take a few minutes to see how he does it. You'll also have the chance to try his next few trades risk free. Click here to learn how. To ensure that you receive these emails, please add us to your address book. 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