No Butts

Altria Group’s stock, MO, (renamed from Philip Morris in an attempt to shed its past litigation baggage), the world’s largest producers of cigarettes had a great run as you can see in my chart below. It rose almost 130% from the start of 2014, topping out in June of last year after creating negative bearish momentum divergence. Since that time, price has broken its uptrend line and currently sits under its falling 200 day moving average. All signs you don’t want to see unless you are positioned short.

To add to the bearish thesis, it has formed a huge two-year head and shoulders topping pattern. If this pattern confirms and eventually plays out, it points to a target down around the $43 level, some 28-30% lower than where it is today. Volume plays an important role in confirmation of these patterns. While it’s not absolutely necessary, as they unfold, an inclusion we would like to see is volume increasing during the decline from the peak of the head to the neckline, decreasing during the advance of the right shoulder and finally increasing during the decline of the right shoulder. Check, check and check. The bears are salivating at this one.

So what we have is one of the best technical analysis setups I have seen of late but I have little conviction in what price is telling us is in store.  Why? I have learned shorting stocks while the market is in an uptrend is a wonderful way of donating your investment capital to someone smarter than you. It doesn’t mean this won’t play out without a decline in the overall market, but rather the odds of success will diminish rapidly. Either way, I will circle back around in a couple of quarters and see if there was anything we could learn in retrospect.