Markets

Chart Predicts This Stock Is Headed For Another Big Drop

While a strong stock can rise on its own merits, it is easier when it is part of a rising sector. Conversely, when an entire sector is falling, even stocks that are not quite so weak can be taken down with it.

The latter is the case for the computer services sector and VeriSign (Nasdaq: VRSN ) in particular. This domain name registry and Internet security stock has already fallen more than 20% from its December high, but given weakness in the sector, there is likely more pain ahead.

Selling a stock that has already dipped into official bear market territory may seem risky. However, in addition to its falling sector, VeriSign's chart offers ample evidence for another double-digit drop. It does not hurt that the broader market is struggling either.

Let's start with the big picture. Amazingly, we can draw a trendline on a log-scaled monthly chart that connects the start of the bull markets in 2002 and 2009 with major lows in 2011, 2012 and 2014. That line is currently in the $64 area, roughly 10 points below recent trading.

VRSN Stock

On its own, that would be an enticing downside target. But let's zoom in to the daily time frame for more.

VRSN Stock

In the summer of 2015, VRSN's price action changed from a choppy trading range into a strong rally. However, that rally accelerated over the next few months until it was unsustainably steep. Even on log-scaled charts, we can see how the slope of any trendline applied got steeper, leaving a parabolic shape on the chart.

Think of it as a stock that woke up and suddenly found itself to be quite popular. Investors could not get enough, and a momentum stock turned into a frothy stock. When shares finally ran out of fuel in December, the decline was even swifter. As they say, parabolic up, parabolic down.

I have noticed that stocks tend to retrace the entire parabola, returning to more sedate levels in effect before its awakening. For VeriSign, that looks to be back in the trading range between $62 and $68.

We can refine this target using a few more technical tools. First, the long-term trendline discussed above is now near $64 and rising slowly. Furthermore, a 38.2% Fibonacci retracement of the 2009-2015 bull run would be $64.75.

But there is more. This week, the stock moved below its 200-day moving average, and it completed a double-bottom breakdown on point-and-figure charts (not shown). Indeed, there is a trendline on that chart currently at $66 -- not far from the bar chart trendline.

Given the weak sector and shaky market, these simple drawing and measuring tools make a compelling argument for a continuation of the current bear run in VRSN.

Recommended Trade Setup:

-- Sell VRSN short on a close below $72.62

-- Set stop-loss at $75

-- Set initial price target at $65 for a potential 10% gain in five weeks

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This article was originally published on ProfitableTrading.com: Chart Predicts This Stock Is Headed For Another Big Drop

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.