The well-known provider of automotive replacement parts, batteries, accessories, and maintenance items for domestic and imported cars, vans, sport utility vehicles, and light and heavy-duty trucks, Advance Auto Parts, Inc. (NYSE: AAP) seems to be ready for a price correction in the near term according to its latest charts.
Bearish Indications
#1 Rising Wedge Pattern: The daily chart shows that the stock has been forming a rising wedge 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 this rising wedge pattern and has the potential to move lower in the near-term.
Daily Chart – AAP
#2 CCI Moving Down: The CCI is currently moving down from overbought levels. This usually means that the stock may reverse to downside soon.
[hana-code-insert name=’adsense-article’ /] #3 MACD below signal line: The MACD line (blue color) is currently below the MACD signal line (orange color), indicating bearishness.#4 Below Support Level: The stock is currently trading below a major support level ( This is marked as a red dotted line.).
This is a possible bearish sign.
#5 Overbought CCI moving down: CCI is currently moving down in the weekly chart after reaching overbought levels, indicating bearishness.
Weekly Chart – AAP
#6 %K below %D: In the weekly chart, the %K line of the stochastic is currently below the %D line, indicating bearishness.
#7 Supply Area: The stock is also near a supply area. This area is marked as a pink rectangle. For the past two years, the stock has not been able to cross above this level. This is a bearish sign.
#8 MACD below signal line: The MACD line (blue color) has crossed below the MACD signal line (orange color) in the weekly chart, indicating bearishness.
Recommended Trade (based on the charts)
Sell Levels: If you want to get in on this trade, the ideal sell level for AAP is above the high of yesterday’s candle at a close of around $170. For those with a higher risk appetite, you can sell half the intended quantity of the shares at the current price of $159.58.
TP: Our target prices are $136 and $123.
SL: To limit risk, place a stop loss at $172. Note that this stop loss is on a closing basis.
Our target potential downside is 14% to 27% in the next 3-6 months.
- Entry at $170: For a risk of $2.00, our target rewards are $34 and $47. This is a nearly 1:17 and 1:24 risk-reward trade.
- Entry at $159.58: For a risk of $12.42, our target rewards are $23.58 and $36.58. This is a nearly 1:2 and 1:3 risk-reward trade.
In other words, this trade offers nearly 2x to 24x 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.
Happy Trading!
Tara
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