In a case of market irony, shares of cosmetics maker Avon Products were down as much as 5.8% just before the start of Valentine’s Day trading. Before the bell, the company announced a loss in the fourth quarter of last year. Apparently, investors fell out of love with the stock.
But not long after regular market hours began, the stock mounted a comeback, rocketing up to a morning gain of 5.4% before easing back a bit. That was a swing of 11.2% in just a few hours and it tells quite a bullish story for investors.
The stock has been out of favor for several years. Since peaking near $36 in October 2007, it followed a steep and often scary descent to its current trading near 18. Clearly, the major trend is to the downside.
However, from failure comes success, at least when reading charts. Monday, the stock fell almost 2% on very heavy volume. Technically, that sparked a breakdown below a rising trendline from December and signaled more pain to come.
When Tuesday’s news broke, the sellers were in full control but then something happened to turn things around – and in a hurry. Perhaps it was the realization that the company was not going to cut its dividend. Or maybe it was simply that all the shares that were for sale (supply) were sold. The stock was washed out.
With Tuesday’s close being well above Monday’s, a technical reversal to the upside was set. And with volume just as heavy as the previous’ day’s total, this could be more than bottom fishing by day traders.
Should the stock follow through with another day of gain, it would not only negate the trendline breakdown but also create an upside breakout through another, more important trendline. By moving above the declining line from July 2001, the market would be telling us that the company may actually be a bargain.
Michael Kahn, CMT, writes the twice weekly Getting Technical column for Barron’s Online and publishes the daily Quick Takes Pro newsletter. Sign up for his free, no-spam technical analysis chart of the day at www.QuickTakesPro.com.