VMI – A High Flyer Crashes

Jun 20, 2008: 11:08 AM CST

Valmont Industries (VMI) has been a steadily rising stock until recently, when bad news destroyed the tranquility of the recent rise.  Let’s look at the charts for some clues and educational lessons.

First, the stock broke above its downtrending moving averages in late March (double arrows), signaling strength in the stock.  The breakout from consolidation led to a higher than average trend move in the stock, which was accompanied on volume that was not as high as could have been expected.

Notice the new momentum high in late April, and the “Impulse Buy” trade that set up.  This was a textbook example of the trade, in that volume steadily declined as price pulled back to its key 20 period moving average, almost begging for you to enter the trade there and place a stop beneath the 20 period EMA.

As expected (but never guaranteed), the stock burst to life and a new trend leg up materialized.

A negative momentum divergence occurred here, as an early warning sign that the stock may have just moved ‘too far, too fast’ and that supply may be ready to come back into the market, as those traders/investors with large profits may be ready to realize those gains.

Price made a third ‘push’ up into a climax just before the surprise drop, and price has now violated its daily moving averages and the rise is potentially over for the time being.

The “three push pattern” and “triple momentum divergence” in no way forecast the shocking decline, but they were clues that buying pressure was weakening and selling pressure might be intensifying.

Let’s peek at the chart on the Weekly time frame:

The situation may not look as bad here, as we have potentially strong support coming in from the 20 period weekly EMA, the $100 per share “round number” support, and the prior resistance zone at $100 which could serve as support now.

Regardless, this stock can provide valuable lessons in its patterns, regarding range consolidation, price expansion into trends, rapid expansion, and then potential rapid contraction.

Notice also how volume has been steadily rising since mid-2007.  Whether or not you want to trade this stock, I would recommend studying its patterns for interesting insights you can use for other trading analysis.

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