Stock Chart STAR

Stock Chart Analysis STAR
Starent Networks Corp. (Public, NASDAQ:STAR)

I mentioned a few times on twitter over the past couple of weeks how STAR was looking bearish to me. Nothing has occurred on the chart to sway my initial thoughts, and in fact, I initiated a short position in STAR last week, when it appeared to turn down after testing its declining 20-day moving average. While the vast majority of my blog posts are of stocks I am watching for an entry, I decided to post this one to show some of the things I am looking at for this setup. In addition STAR is starting to look like it is ready to break down from a topping pattern, and is still within a reasonable area to enter a new position from a risk versus reward perspective.

In looking at the chart, STAR has been in an undeniable uptrend, making higher highs and higher lows. It has been steadily finding support on pullbacks, and hasn't had any parabolic moves that weren't sustainable. While the majority of the price action has been healthy, there have been subtle signs of distribution setting in. In early July, STAR pulled back in a typical manner to its 20 day moving average, and predictably found support. On the succeeding rally, STAR broke to new highs, and quickly failed. Notice the topping candle on the day it hit a high of $27.08. It subsequently gapped lower the next day on strong volume. It hasn't recovered from that failure, and the gap remains unfilled. This tells me that there is a pocket of trapped traders willing to sell anytime STAR approaches the gap. STAR has been trading in a flat range, unable to break back above its 20 day moving average, a level that consistently held as support. Beyond that, it is now below its 50 day moving average as well.

Moving past these small details, if you step back and examine all this trading action as a whole, it appears that STAR is forming a larger topping pattern. While the base looks like a head and shoulder top, the name really isn't important. What is important, is that there has been an increase in volume as STAR has basically traded sideways after a healthy move higher. Consolidations should take place on decreasing volume. Increasing volume usually signals distribution. In order to get a better picture of volume, I added Volume Average Price bars to the chart, which show the majority of the volume shown on the chart has taken place in this base. This tells me that if STAR breaks under the pattern, that the majority of traders involved will be underwater. Now before getting carried away, also note that STAR is technically sitting on support, and could easily bounce from these levels. It could also easily break down trapping bears, and then break back higher. While I don't believe these scenarios are likely, they do exist. Just be aware that even the best looking setups can fail, and the most important thing a trader needs to do is to always exercise due diligence and maintain strict discipline with regards to money management.




Good Trading,

Joey