The Texas-based public utility company, engaging in the generation, transmission, and distribution of electricity in west Texas and southern New Mexico, El Paso Electric Company (NYSE: EE) seem to be ready for a price correction 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 lines in the daily chart. Once the stock reaches the upper rail and breaks down from the rising wedge pattern, it has the potential to move lower in the near-term.
Daily Chart – EE
#2 Bearish Divergence between RSI and Price: The daily chart shows that there is a bearish divergence between RSI and price.
[hana-code-insert name=’adsense-article’ /]This is because while the price was making higher highs, RSI was forming lower highs.This usually indicates the possibility of an upcoming bearish move.
This bearish divergence is marked as blue dotted lines.
#3 MACD below signal line: The MACD line (blue color) is currently below the MACD signal line (orange color), indicating possible bearishness.
#4 Broken Uptrend: The weekly chart shows that the stock had broken down from an uptrend and is facing resistance when attempting to cross higher again.
This is a possible bearish sign.
Weekly Chart – EE
#5 Bearish RSI: The RSI is currently moving down after reaching overbought levels in the weekly chart as well. This is also a possible bearish indication.
#7 %K below %D in Stochastic: In the weekly chart, the stochastic is currently moving down from overbought levels. The %K line has also crossed below the %D line. All these indicate possible bearishness.
Recommended Trade (based on the charts)
Sell Levels: If you want to get in on this trade, you can sell the shares of EE at the resistance level of $62. This sell level is marked as an orange dotted line in the charts above.
TP: Our first target price is $56 and if the stock closes below this price, the second target price is $50 in the next 3-6 months.
SL: To limit risk, place a stop loss at $64. Note that this stop loss is on a closing basis.
Our target potential downside is 10% to 19% in the next 3-6 months. For a risk of $2.00, our target rewards are $6.00 and $12.00. This is a nearly 1:3 and 1:6 risk-reward trade.
In other words, this trade offers nearly 3x to 6x 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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