Technicals Say This Stock is an Immediate 'Sell'

The trend is your friend... until it ends. And for business uniform maker Cintas (NASDAQ: CTAS), it looks like the end is near. Whether you're a short-term trader or a long term-investor, all signs point to a coming price debacle for the stock.

This is true even after the company reported better-than-expected fiscal first-quarter earnings results after the bell Tuesday and raised its annual guidance.

The stock promptly scooted from Tuesday's close of $113.43 to a high above $119 overnight. Shares opened Thursday morning just below that peak, and it was all downhill from there. 

The hint of good news caused the stock to pop higher on what analysts called a massive short squeeze. But volume accumulation indicators showed money was flowing out of the stock a few days prior to earnings, so it wasn't long before the bears regained control. 

CTAS fell more than 4% on Thursday, resulting in several bearish technical reversals and breakdowns.

CTAS Stock Chart

Starting with the most obvious, bad action on good news is bearish, and Thursday's close was below pre-earnings levels and also below the bottom of the sideways pattern that had been in effect since mid-August.

Weekly charts show the potential for this week's bar to be a downside follow-through move on the heels of a bearish reversal three weeks ago. That bar opened above the previous bar's high and closed below its low to create an even more potent signal called a key outside-week reversal. This tells us something important changed in the market's mood that week.

Finally, on monthly charts with one day left to trade, September is shaping up to form a bearish reversal of its own. 

Momentum indicators in all three time frames are declining, suggesting the power behind Cintas' long bull run is gone. We can even see declines in volume each time the stock jumped higher in price -- in July, August and again this week. This shows few people were willing to chase the stock at each higher level.

We can argue whether the daily chart shows a completed head-and-shoulders or a double-top pattern. However, we have to acknowledge that the short-term trendline from June is broken to the downside. That puts the target for the current decline in the $95 area, which corresponds to the top of the 2015-2016 trading range. That would also be roughly a 61.8% retracement of this year's rally.

Some traders may not be comfortable selling a stock after a sharp two-day sell-off. However, rather than wait for a bounce that may never happen, it could be a good idea to prepare for volatility by starting with a smaller position size and then adding to it once the trend becomes clear. You could also lower your risk by employing a "backdoor" method used by the smartest traders on Wall Street. Get the details here.

Recommended Trade Setup:

-- Sell CTAS short at the market price 
-- Set stop-loss at $117
-- Set initial price target at $95 for a potential 15% gain in eight weeks 

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