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As the post-election rally rumbles on and the Dow Jones Industrial Average flirts with the overhyped 20,000 level, it's rare to see a stock trading nearly 20% off its best levels of the year.
But that is what we have with information technology company Convergys (NYSE: CVG), and this underperformance does not bode well for the shares going forward.
Zacks added CVG to its "strong sell" list this month and has lowered its full-year earnings estimate by 3.7% in the past 30 days. While I rarely include fundamentals in my stock reviews, this certainly supports a bearish stance. Of course, I let the chart tell me what (if anything) to do about it, and right now the technicals agree that the bears are in charge here.
The company, which provides outsourcing for customer management services, announced its third-quarter results after the bell on Nov. 8. It matched profit estimates but missed on revenue, and the stock tumbled 8.5% the next day, slicing through its 200-day moving average. This also started to break a strong rising trendline to the downside.
This trendline originated at the October 2014 low, following a rather sharp correction. During the ensuing rally, this line was tested four times before last month's breakdown, which makes the break that much more important. The stronger a technical feature, the more significant a break from it becomes.
CVG then settled into a pausing pattern -- a symmetrical triangle in this case -- which is often a rest stop in an existing trend. That trend was clearly to the downside, so the odds favor a resolution in that direction.
Confirming the bearish thesis is a cross of the short-term 50-day moving average below the long-term 200-day, which some may refer to as a death cross. While that term is usually reserved for the major market indices, the spirit is the same with individual stocks. It denotes the "proper order" for a declining trend with price below short average and short average below long average.
Another indicator that is quite bearish is on-balance or cumulative volume. This keeps a running tab of volume changing hands on up days minus volume on down days, and it serves as a proxy for money flowing into or out of a stock. That, in turn, gives us a handle on supply and demand. With the indicator at its lowest level in nearly two years, it's safe to say that sellers have the upper hand.
Chart watchers will want to see the triangle pattern break to the downside before initiating a short position. That means we're looking for a move under the lower border at $24.60, assuming it happens within a day or two.
Keep in mind that triangle borders are moving targets, so we'll need to pay attention to how long we have to wait for this to trigger. We don't want to wait too long, because a pattern that breaks due to the passage of time rather than vertical price movement is likely not what it originally appears to be.
In other words, there is about a two-week time limit here in which to initiate this trade. After that, we'll probably have to look elsewhere. Additionally, a move above $25.80 would signify an upside breakout and would negate the bearish trade.
But I don't think that's the way things will shake out. The evidence favors the bears, and based on the size of the triangle and location of support levels over the past two years, the downside target is in the $22.30 area.
This offers traders a potential 9% gain if they wait for the trade signal, with the target likely to be hit in a few weeks. That's certainly respectable, but if you're looking for even bigger gains, a simple "backdoor" strategy could return 45% to 90% while risking a fraction of the dollar amount it will cost you to short shares. Unlock the "backdoor" strategy here.
Recommended Trade Setup:
-- Sell CVG short at $24.60 or below
-- Set stop-loss at $25.80
-- Set initial price target at $22.30 for a potential 9% gain in three weeks
This week, my system pinpointed the ripest trade out of a database of 6,129 stocks — a perfect "needle in a haystack" trade.