Shares of sports apparel company Under Armour Inc (UA) have been under pressure in recent weeks, and in fact appear to have developed a better topping pattern.
Translation: Traders can look to play UA stock from the short time with a defined downside target.
After Under Armour reported its latest upbeat earnings in October, where it also raised its 2014 full-year revenue outlook, UA stock proceeded to rally more than 10% over the ensuing month-and-a-half, but has since fully retraced this rally. Furthermore, the consumer discretionary sector as a whole — to which Under Armour belongs — increasingly looks tired and ready for rest.
To be sure, it hasn’t paid to bet against UA stock; the growth issue has routinely surprised on the upside. So I’m also not looking to take a particularly bearish stance against Under Armour — rather, I simply see a stock that looks increasingly tired from the upside and thus has better odds for further consolidation lower.
UA Stock Charts
On the multiyear weekly chart, we see that while momentum (per the Relative Strength Index at the bottom of the chart) topped out in March 2014, the stock proceeded to rally another 20% into September, while the RSI has since formed a series of lower highs. Additionally, the Bollinger Bands (blue lines) on the weekly chart have tightened recently, thus increasing the probability of a better directional move in the intermediate term.
On the daily chart, we see that UA stock since its September highs has developed what increasingly looks like an intermediate-term double-top formation. In July, UA stock gapped notably higher to new all-time highs and managed to stay afloat until September.
From there, however, the stock began to slip along with a host of other trend-follower favorite stocks. UA then found support in mid-October at its previous breakout point before making another run at the September highs, which it reached by late November and then subsequently failed at those highs a second time.
This double-top now is the biggest obstacle for the bulls to overcome through a multimonth lens, while bears can use it to lean against on the short side.
UA stock now also has a clear attraction level below it, which is its mid-October lows around the $60 mark. Active investors and traders could now look to sell short UA stock at $65 or lower with a price target around $60.
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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.
