Shares of package delivery and freight company FedEx (FDX) fell a little more than 2% Monday, but the way the stock quickly reversed lower from intraday highs is what really spells trouble ahead. Active investors and traders could look to play FDX stock on the short side, using Monday’s highs as a stop-loss area.
It was just two weeks ago that the transportation average pushed to fresh all-time highs along with the large-cap indices. However, these new highs also came on deteriorating upside momentum.
On Sept. 17 before the start of trading, FedEx reported better-than-expected results for its fiscal first quarter. Earnings of $2.10 per share beat estimates of $1.94, while revenues of $11.7 billion topped analyst estimates of $11.47 billion. On the back of this, FDX stock rallied more than 3% and broke to fresh all-time highs.
However, Monday’s bearish reversal puts this breakout move in danger of being turned lower.
On the multiyear weekly chart, we see that FDX stock has moved steeply higher over the past 15 months or so after a big breakout move in early 2013. But the bears have been pointing out for some time that while FedEx stock continued to lift, upside momentum — as represented by the relative strength index — has been waning and making a series of lower highs. The duration of the rally, given the steepness of its slope, also is long in the tooth.
All of this begs for a mean-reversion move lower in FDX stock, but from a multiyear perspective, this actually would be a healthy accomplishment.
On the daily chart below — much to the frustration of the bears, who have been flagging the aforementioned waning upside momentum — FDX stock kept building higher bases that lead to breakout moves with strong breakaway gaps.
The breakaway gap rally on June 18, for example, kept the stock moving higher for the ensuing two weeks, after which it settled into a multimonth consolidation phase. The next up-gap then came on the September earnings report. But instead of quickly running higher, FDX stock has mostly consolidated since.
Monday’s price action was such that FDX gapped higher on the day, but quickly began to run in reverse on increased volume after just 15 minutes of trading, leading the stock to close the day at the absolute lows.
Also note that this bearish reversal, or bearish outside day, also fully engulfed the previous day’s price action — a loud statement by the bears that they are looking to take charge at least temporarily.
Active investors can now look to get short FDX stock for a mean-reversion move at least into the low $150s, using Monday’s highs near the $165 area as a stop loss.
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Download Serge’s trading plan in the Essence of Swing Trading e-book here. As of this writing, he did not hold a position in any of the aforementioned securities.
