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 Bearish Engulfing candlestick pattern: The daily chart shows that the stock has currently formed a bearish engulfing candlestick pattern.
This is marked as an orange ellipse in the daily chart.A bearish engulfing candlestick pattern comprises of two candles and appears during an uptrend.
The first candle would be a small green candle while the second candle would be a big red candle.
The second day’s candle would completely engulf the body of the first day’s candle.
The formation of this pattern indicates possible bearishness.
The red candle is also a bearish marubozu candle, which is a further bearish indication.
Daily Chart – DORM
#2 Price Below MA: The stock price is currently below the 200-day SMA. This indicates that the bears are gaining control.
#3 %K below %D in Stochastic: The %K line has now crossed below the %D line in stochastic. It is also moving down from overbought levels. All these indicate possible bearishness.
#4 Bearish RSI: The RSI is currently moving down from overbought levels, which is a possible bearish sign.
#5 Below Resistance Level: The daily chart shows that the stock is currently trading below a strong resistance area. This is marked as a pink color dotted line. This seems like a good area for correction.
#6 Unbroken Downtrend: The weekly chart shows that the stock is still on a downtrend as it has been forming lower highs and lower lows. This downtrend line is marked in purple color. This is a possible bearish indication.
Weekly Chart – DORM
#7 Bearish Aroon: The Aroon indicator shows bearishness as the Aroon up is below 30 and the Aroon down is above 70 in the weekly chart. This is a possible bearish indication.
#8 Bearish ADX and DI: The ADX and DI indicate bearishness in the weekly chart. This is because (+DI) < (-DI); ADX and (-DI) are above (+DI); and ADX has risen above both (+DI) and (-DI). All these points to possible bearishness.
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 trades below yesterday’s close. This translates to a price below $62.
TP: Our target prices are $55 and $50 in the next 3-6 months.
SL: To limit risk, place a stop loss at $66.80. Note that this stop loss is on a closing basis.
Our target potential downside is 11% to 19% in the next 3-6 months.
For a risk of $4.80, our target rewards are $7.00 and $12.00. This is a nearly 1:2 and 1:3 risk-reward trade.
In other words, this trade offers nearly 2x to 3x rewards compared to the risks.
Risks to Consider
The stock may reverse its overall trend if it breaks upwards from the resistance area 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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