Caution: This Stock Looks Ready For a Correction

The popular supplier of original equipment dealer, automotive replacement parts, and fasteners and service line products primarily for the automotive aftermarket, Dorman Products Inc. (NASDAQ: DORM) seems to be poised for a decline in its price in the near term as per its latest charts.

Bearish Indications

#1 Descending Triangle Pattern Breakdown: The daily chart shows that the stock has been forming a descending triangle pattern during the past few months. This is a bearish pattern and is marked in purple color in the daily chart. The stock has currently broken down from the descending triangle pattern. A breakdown from a bearish pattern like a descending triangle pattern usually indicates that the stock could move lower in the near-term.

Daily Chart – DORM

#2 Price below MAs: The stock price is currently below both 50-day as well as 200-day SMA. This is a bearish sign.

#3 MACD below signal line: The MACD line (blue color) is currently below the MACD signal line (orange color), indicating bearishness.

#4 %K below %D in Stochastic: The %K line is now below the %D line in stochastic.

This indicates possible bearishness.

#5 Bearish ADX and DI: The ADX and DI indicate bearishness.

This is because (+DI) < (-DI); ADX and (-DI) are above (+DI); and ADX has started rising from below both (+DI) and (-DI).

#6 Consolidation and breakdown: The weekly chart shows that the stock was consolidating and has currently broken down from the consolidation area.

This is marked as a pink color rectangle in the weekly chart below. The chart also indicates that the short-term uptrend of the stock has been broken. All these indicate possible bearishness.

Weekly Chart – DORM

#7 MACD below signal line: The MACD line (blue color) is currently below the MACD signal line (orange color) in the weekly chart, indicating bearishness.

#8 Bearish Aroon: The Aroon indicator shows that Aroon Up (orange line) is below 30 and Aroon Down (blue line) is above 70. This is a possible bearish sign.

#9 Price below MA: The stock is currently below the 50-week SMA, indicating that the bears are now in control.

Recommended Trade (based on the charts)

Sell Levels: If you want to get in on this trade, the ideal level for taking short positions on DORM is if the stock moves up to the gap resistance of around $77.

Note: For those with higher risk appetite, you can sell one-fourth the intended quantity of shares of DORM at the current price of $71.88.

TP: Our target prices are $70 and $60 in the next 3-6 months.

SL: To limit risk, place a stop loss at $80. Note that this stop loss is on a closing basis.

Our target potential downside is 9% to 22% in the next 3-6 months.

For a risk of $3.00, our target rewards are $7.00 and $17.00. This is a nearly 1:2 and 1:6 risk-reward trade.

In other words, this trade offers nearly 2x to 6x rewards compared to the risks.

Risks to Consider
The stock may reverse its overall trend if it breaks upwards from the descending triangle 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.

Happy Trading!

Tara

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