Colgate Technical Analysis

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Colgate, CL, is a stock I have watched for a long time. I have traded it a couple times, but don't have any current trade on it. It is showing an ideal longer term position trade short sale set-up right now, so I though I'd bring it to the table and tie a few technical things together as well.

First off notice the breakaway gap down off the most recent peak. The gap was large for this stock, and occurred on the heaviest volume in over a year. This happened right as the stock completed a retracement of last fall's crash to challenge the highs.

Now it's been basically a month since the gap, and while the market has made higher highs it hasn't. In fact, at no time since the gap has price traded back above the open of that gap down. This shows weakness in the buying interest. Most successful breakaway gaps don't get completely filled, so the longer price chops in this zone, the higher the chance it is a major trend changing gap down.

The blue box represents the time consumed by the moves I have labeled A and B. Now the actual labeling is not what I'm trying to show here, though it does appear to be a corrective type pattern. The point is that I find that one of the most reliable topping time frames for a pattern like this, is for the C leg to take the total amount of time as A and B combined. While CL meandered a bit higher after that for a week or so, sure enough, it showed the already mentioned gap down near that time frame to help confirm that it was following that time relationship.

There is a stochastics chart above showing that it has had time to become overbought after this gap down. Also, not shown is the weekly chart in which the stochastics has just turned down out of overbought territory. I like using stochastics on multiple time frames and look to time entry on a larger scale pattern with the next lower time frame.

Also, notice the increasing volume at major breaks to new trend highs up through the middle of wave C, then the waning volume from middle to end. That is not so important now, but is important to learn for evaluating a move as it is occurring.

For trading purposes, I would short this right here with a stop just above the 76.00 level. Now I wouldn't expect it to drop hard right away, but I know from experience with breakaway gaps that it may not have much upside left, and the reward profile is good even entering now. I have shown support levels that could be used to scale out of part of the trade assuming it went down from here. Also as each target is reached the stop on the rest of the trade should be moved down in some fashion to lock in increasing profit on the rest of the position in case it doesn't continue down.

Ultimately, if this proves to be a major inflection point, I would expect prices to fall at least marginally below the October and March lows, which may be the final level at which to scale out if that level is reached. It would take several months for this to occur, but for longer term traders, you may want to look into this further.