Trade of the Day: ITT Educational (ESI)

by Profit Scanner | June 23, 2014 9:17 am

Last week was undoubtedly a great one for the stock market, thanks to Wednesday’s dovish Fed statement. As a result, the major indexes were up 1%-2% on the week, and the S&P looks like it has a clear shot to 2,000. Considering that the index made a similar move in just the last week, it shouldn’t take long for it to reach that particular threshold. But that’s not to say that every stock is going to come along for the ride…and one in particular is flashing a hard-to-ignore sell signal.

It’s been a rough month for ITT Educational Services (ESI[1]). The company’s woes came to a head on May 22, when its quarterly announcement showed several worrisome trends: enrollments and student persistence were both down, and ITT expects new-student enrollment to drop again in the second quarter, anywhere from 10% to 15% year-over-year.

The reaction was swift: Shares gapped lower immediately following the report (and have stayed down), and analysts at TheStreet soon downgraded their rating on ESI. Zacks followed suit on June 11, citing the disappointing Q1 figures and forward guidance, as well as the fact that a number of law firms had begun to investigate the company.

Sure enough, a few days later came an official investor lawsuit alleging that ITT Educational Services had concealed its weak financials and “pushed students into high-cost private loans that were likely to default.” With all of this heat coming down on ITT, it comes as no surprise that ESI stock is down 34.2% since the disastrous Q1 report, while its peers in the larger Russell 2000 small-cap index are up 7.7%.

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But ESI doesn’t appear to be out of the woods just yet. On June 19, Profit Scanner identified three short-term bearish signals for the stock; one of them, the Bearish Pennant, carries a downside target for ESI stock of $7.25-$9.00, which is expected to resolve in the next 12 days.

The emergence of this Bearish Pennant pattern indicates that ESI’s brief pause is over, and that it is resuming its previous sharp decline. In this case, we’re looking at a further drop of about 50% in just a couple of weeks. A volume spike is the key validator of this pattern, and ESI did experience trading volume that was 15% above average on Thursday, when the pattern emerged.

The Bearish Pennant pattern consists of two converging trend lines and volume that diminishes after the initial spike, and is confirmed when the price breaks down through the lower boundary to resume the decline.

It should all play out very quickly; after four weeks, interest in the stock is likely to decrease to the point that it is unlikely to continue in a strong downtrend. In other words, you’re not going to want to hold a bearish position in ESI any longer than a month. And for those looking to play it safe on this one, the Profit Scanner places a tight stop-loss level for ITT Educational Services at a close above $19.15.

While it does not make options recommendations, traders may want to take a look at the July options chain. ESI’s options are pretty cheap, and there’s a good amount of open interest in the puts. If the 50% drop does occur, that could spell big money for options traders.

Profit Scanner powered by Recognia can help traders of all levels uncover these signals to determine the best timing to buy. Or use Profit Scanner’s technical insight to validate your own trading ideas. See how easy this powerful tool is to help you uncover hidden opportunities in the market[3].

Source URL: https://investorplace.com/2014/06/trade-of-the-day-itt-educational-services-esi-stock/

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