With stocks continuing their 2013 rally, the probability of further gains without any better consolidation in price is reduced by the day. This is not to say that stocks can’t continue to rise, but overbought stocks that are flagging the consolidation sign may be worth trying on the short-side for a trade.
My chart flipping activity on Sunday revealed three stocks with the same high probability pattern, a bearish outside candle. Best of all, as always, each of the following three stocks offers very defined risk so that there is no second-guessing the stop-out level.
While in strongly trending up-markets these types of candlestick formations have a somewhat lower probability of being profitable trade setups, on average a trader following such formations will still come ahead during a 12-month period.
First up, Lumber Liquidators Holdings (NYSE:LL), which on Friday hit a new intraday high before selling off and leaving a visually obvious outside day behind on its daily chart. As a word of caution, the company is scheduled to report its next earnings statement tomorrow, Wednesday February 20, and I for one don’t trade into earnings. Otherwise the stock sets up well with defined risk at Friday’s highs near $64.50.
Next, Enterprise Products Partners LP (NYSE:EPD) on Friday came within a few pennies of matching its all-time high from last Thursday before selling off and marking the top with a red outside day candle. Also of note is the negative divergence which the Stochastic momentum oscillator is flashing versus the price action.
And thirdly, Plains All American Pipeline (NYSE:PAA) which also reached a new all time high last Thursday but finished the day with a shooting star candle, and followed through with weakness on Friday, displaying an outside day.
As a side note, both Enterprise Products Partners LP and Plains All American Pipeline belong to the energy sector, which has lagged the broader market in recent days. No one knows whether the energy sector or the broader market proves to be the right tell on this, but I would be remiss to not at least point this divergence out in conjunction with the bearish outside days on the two energy stocks discussed above.