Longstanding readers of this section in the CANSLIM.net After Market Report are well versed on the importance of upward trendlines. It is also important to note how stocks behave after an upward trendline is violated. By definition, an upward trendline develops when a stock has steadily appreciated for an extended period of time. During that period the stock vacillates between the lower and upper boundary of the trendline. However, once the bears show up and the lower trendline is violated then odds start favoring the possibility of further downside testing.
Citi Trends (CTRN -$1.58 or -3.79% to $40.09) gapped lower on Wednesday, slicing its upward trendline. This stock was recently featured on December 20, 2005 in the CANSLIM.net Mid-Day Breakouts Report (read here) as it was breaking out of a six week base. This was eight months after its Initial Public Offering (IPO). This issue has spent the past 5 months tracing out a solid uptrend. Not only was an important technical level violated, the violation occurred on three times average volume. Wednesday's disconcerting action triggered a technical sell signal.
An upward trendline, by definition, develops as a stock steadily appreciates over an extended period of time. During that period the stock vacillates between the lower and upper boundaries of trendlines which can be drawn connecting a series of recent highs or lows. In order to ensure the overall health of the stock, the lower boundary should not be violated. Technically, if the lower boundary is violated this signals that the trend is deteriorating and bears are gaining control, making the odds start to favor the possibility of further downside testing.
Citi Trends Inc. (CTRN -$0.31 or -0.75% to $40.80) has pulled back in recent days, meanwhile the major averages broke out to new highs. One of the greatest ways to isolate weakness is to look for stocks that can not rally in a strong market. Of course, this company also announced a proposed offering of additional shares, which could be expected to hinder its upward price progress for the near term. However, this recent IPO initially performed well, rising as much as +12.06% since it was first featured on December 20th, 2005 in the CANSLIM.net Mid-Day Breakouts Report when it was breaking out of a two-month base (read here). As this issue has advanced, it has traced out a clear upward trendline. It is somewhat important to see the stock stay above that trend line, as a violation could be considered a sign of its strength deteriorating, which could be considered an early technical sell signal.