Sodastream International Ltd: Beware of This Sinister Chart Pattern
SODA Stock: Double Top Still in Play
Sodastream International Ltd (NASDAQ:SODA) stock hit my radar screen this morning. At first glance, I was really excited about what I saw; my head was spinning with different ways I could capitalize from the new bull market, which was so obviously painted on my screen. I usually like to focus on stocks that have good upside potential because most investors are more willing to go long versus short and my initial instincts supported this.
It was not until I pulled up the long-term chart of SODA stock that my jaw dropped. I was no longer looking at a bullish picture. The pattern that I had initially thought was bullish had a more sinister connotation.
The following SODA stock chart is what caused my initial excitement:
Chart courtesy of www.StockCharts.com
A downtrend had dominated SODA stock since June 2013. The downtrend line (highlighted in blue in the chart above) is created by connecting the peaks. A downtrend is defined by lower lows and is confirmed by lower highs. It can easily be identified as the price moves from the upper left of a chart to the lower right. This is a clear example of bearish price action.
My excitement began when I noticed that SODA stock finally broke above its downtrend line on May 2, 2016. The pattern of lower highs and lower lows had ceased and, in theory, this action suggested an end to the bear market.
SODA stock is up 83% since breaking that downtrend. The problem is that the good news ended there.
Once I decided that I needed another perspective, all my enthusiasm was lost. I was possibly looking at a pattern that could be best described as a bull trap, because I was almost coaxed into adopting a bullish bias.
The long-term chart of SODA stock is below and it is indeed a sinister-looking chart:
Chart courtesy of www.StockCharts.com
A double top formed in June 2013 and was confirmed in October 2014, when shares closed below the horizontal support line, which now marks horizontal resistance.
A double top is a reversal pattern that appears at the top of a trend. It is marked by two consecutive tops. The reversal is confirmed when shares close below the trough that separates the two tops.
This is where the current news gets ugly. The current run in the stock’s share price defined by the trend break has run right into the horizontal resistance. Share prices have a tendency to return and retest support and resistance breaks. Traders refer to this as a backtest. If SODA stock is unable to break above $29.00 on a sustained basis, this could have marked the exact top of the counter-trend rally and further downside is expected.
Backtesting a double top is a dangerous omen. I would strongly suggest exiting and/or reducing positions in a stock like SODA until the horizontal resistance is finally broken to the upside.
The Bottom Line on SODA Stock
It pays to view charts on multiple timeframes. A stock chart that looks great on one timeframe may look completely different on another. SODA stock is a great example of this. My initial instincts were to look for bullish setups; a quick view of the long-term chart threw a wrench in my bullish bias.
At the current juncture, I would retain a neutral position. I am on the lookout for a bullish setup that will take out the resistance level or a short setup that points to further downside.
