The American manufacturing company based in Lake Forest, Illinois, Packaging Corp Of America (NYSE: PKG) seems to be ready for a price correction in the near term according to its latest charts.
#1 Descending Triangle: The daily chart shows that the stock has been forming a descending triangle pattern during the past few weeks. This is a bearish pattern and is marked in pink color in the daily chart. The stock is currently moving up from the bottom of the descending triangle pattern. If the stock breaks down from the bottom of the descending triangle pattern, it may move lower in the near-term.
#2 Gravestone Doji: The latest candle is a Gravestone Doji with a long upper shadow. A gravestone doji is a bearish reversal candlestick pattern formed when the open, low, and closing prices are all near each other and has a long upper shadow. This is a possible bearish sign.
This indicates the stock may move lower in the near-term.
#4 Price below MAs: The price is currently below both 50-day and 200-day SMA.
The 50-day SMA has also crossed below the 200-day SMA.
These are all bearish signs.
#5 Uptrend Broken: The weekly chart shows that the stock’s uptrend has been broken.
The uptrend line is shown as a purple color line in the weekly chart. The stock has also broken the previous pivot low.
#6 Below 50-week SMA: The stock is currently below the 50-week SMA. This generally acts as a good resistance level, indicating that the stock may find it difficult to move higher.
#7 MACD below signal line: As you can see from the daily chart, the MACD line (blue color) is currently below the signal line (orange color), indicating a bearish bias.
#8 H&S Pattern: As you can see from the weekly chart of PKG, the stock has recently formed a Head and Shoulders (H&S) pattern. This H&S pattern is marked in the chart in orange color. An H&S pattern is a strong bearish pattern and a breakdown from this pattern indicates that the stock may move lower in the short term. Typically, a stock corrects back to the breakdown level of the H&S pattern before resuming its downmove.
Recommended Trade (based on the charts)
Sell Levels: If you want to get in on this trade, the ideal sell level for PKG is if it falls below $110. For those who want a quicker entry, you can sell at the current price of around $114.81.
TP: Our target prices are $100 and $90 in the next 3-6 months.
SL: To limit risk, place a stop loss at $117.50. Note that this stop loss is on a closing basis.
Our target potential downside is 12% to 22% in the next 3-6 months.
Entry at $114.81: For a risk of $2.69, our target rewards are $14.81 and $24.81. This is a nearly 1:6 and 1:9 risk-reward trade.
Entry at $110: For a risk of $7.20, our target reward (TP#2) is $20.00. This is a nearly 1:3 risk-reward trade.
In other words, this trade offers nearly 3x to 9x rewards compared to the risks.
Risks to Consider
The stock may reverse its overall trend if it breaks upwards from the rising wedge pattern with high volume. The breakout of the stock could also be triggered in case of any positive news, overall strength in the market, or any regulatory changes in its sector.
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