After more than a year, the S&P 500 recently hit new all-time highs. Unfortunately, not every stock has been invited to the party. Despite the rising tide of the market, Bed Bath & Beyond Inc. (NASDAQ: BBBY) remains more than 43% off its all-time highs from back in 2014.
One look at the stock’s chart reveals a bearish technical pattern that could mean that Bed Bath & Beyond still has significant downside ahead.
After Bed Bath & Beyond plummeted from near $80 in early 2015 to around $41 in early 2016, the stock’s free-fall has been on hold throughout the past several months. In fact, the support at $41 has held a number of times, which may have given bulls a certain degree of hope that the bottom is in for the stock.
But while short-term support has been holding, resistance has continued to fall. As a result, the chart has formed a descending triangle, a notoriously bearish technical pattern.
According to StockCharts, the descending triangle is “a bearish formation that usually forms during a downtrend as a continuation pattern,” which would seem to match Bed Bath & Beyond’s situation perfectly.
The idea behind the formation is that sellers are unwilling to sell below $41 in the short-term, but buyers are increasingly unwilling to buy the stock at higher prices. As a result, the stock has traded in an increasingly narrow range, and the resistance and support lines are headed for a convergence.
For now, traders need to be watching the support line at $41 and the resistance line, which currently sits at around $47. Until the stock breaks outside one of those two lines, the descending triangle is still in play.
A breakdown below $41 likely means the downtrend is back in play and the stock will be headed for a re-test of 2010 support at $35.
In the longer term however, the price projection following a descending triangle breakdown is typically equal in magnitude to the widest part of the triangle itself. In Bed Bath & Beyond’s case, that width is roughly $16.50, meaning the new longer-term target would be $24.50.
If Bed Bath & Beyond does eventually record its bearish descending triangle breakdown below $41, traders will be looking for confirmation that the move is for real. High volume typically accompanies big technical breakdowns. In addition, after a true breakdown, the $41 support level will turn into a resistance level, and any return to $41 will serve as a selling opportunity.
Disclosure: the author holds no position in the stocks mentioned.
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