Providian’s Verdict
The market hates uncertainty, and as
we witnessed in Florida, nothing casts a larger pall of uncertainty than the
courts. Shares in Providian Financial Friday showed how bullish a settlement to
litigation can be for a fundamentally strong company.
Overnight, Providian Financial
(
PVN |
Quote |
Chart |
News |
PowerRating),
the sixth largest U.S. credit card issuer, announced a $105 million settlement
to put to bed a series of lawsuits accusing the company of deceptive marketing,
charging customers for products they never ordered and other abuses. Providian
said the settlement would not affect its Q4 earnings guidance.
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The stock on Friday jumped 4 1/2 to 57 1/2 on
volume of 3.8 million shares, 38% above average daily volume over the past 50
sessions. Not blow-out volume but healthy, particularly given the stock’s
substantial average trade. To appeal to the intermediate-term trader, the stock
needs to back and fill before moving higher. Avoid sharp V-shaped recoveries.
They are failure prone. Providian’s relative strength line also needs to clear
its prior peak (see Point A in the above
chart) on or before any breakout play.
Pattern recognition forms a large part
of TradingMarkets. In the past, I’ve pointed out a variety of set-ups —
cup-with-handles, double bottoms, Lizards, Ledges. When you trade patterns, it’s
important to strike a balance between applying strict technical criteria and
enough flexibility to hear the market’s message even when it may be expressed in
forms that don’t strictly apply to your idea of a setup or pattern. Try to look
at each stock chart with fresh eyes, rather than trying to impose on it a
pre-conceived pattern. Realize that two traders can look at the same chart and
often see a different pattern.
I got a demonstration of this earlier
this week. Because we are in what might be a bottoming market, I’m on a
heightened alert for cup-with-handle bases, as these formations tend to
proliferate at bottoms. In my Dec. 27 Trading
The News commentary, I pointed out that Advance Paradigm
(
ADVP |
Quote |
Chart |
News |
PowerRating)
had broken out of a cup-and-handle-like structure, although the handle was
forming the lower half of the cup. This is normally a risky structure. You want
the handle for form in the upper half of the cup.Â
However, in this case, the bullish
trading action, including an extreme volatility contraction with a complementary
volume contraction leading up to the price breakout on high volume.
Dave Steckler,
institutional equity advisor for LPL Financial Services and practitioner of
intermediate-term momentum strategy, looked at the same chart and sent me an
email saying that he saw a valid triangle rather than a questionable
cup-with-handle. Sure enough.
The following chart outlines an
ascending triangle, including the Dec. 27 breakout (Point
A) as well as my pivot, 1/8 point above the Dec. 11 high (Point
B). Notice the volatility and volume contractions as the stock nears
the apex of the triangle. Thanks, Dave!
The top field of all charts in this
commentary uses a logarithmic price scale and displays a 50-day price average in
red. In the second field, a
blue relative strength line represents the displayed security’s price
performance relative to the S&P 500. The third field displays vertical daily
volume bars in black with a 50-day moving average in blue for volume.
All stocks, of course, are risky. In
any new trade, reduce your risk by limiting your position size and setting a
protective price stop where you will sell your new buy or cover your short in
case the market turns against you. For an introduction to combining price stops
with position sizing, see my lesson,
Risky Business. For further treatment of these and related topics,
you’ll find extensive lessons in the Money
Management area of TradingMarkets’ Stocks Education section.