July 29th, 2007

IPOs Like MeadWestVaco (MWV)

I have been doing my weekly scan of charts in my watchlist and am amazed at the amount of damage the past week did to the charts of stocks that looked like they were setting up for breakouts over the coming weeks. Perhaps this is action to be expected just prior to a major upside break (action that elsewhere is called the formation of a “handle” in cup-and-handle patterns) but it’s still unnerving.

Even stocks that broke recently through resistance trendlines have, over the past week or so, not only retreated but failed the test of those lines as support. What this means is that new price target areas will have to be found at lower levels.

Here’s an example of one that I own, MeadWestVaco Corp (MWV):

The stock broke out on the upside at the beginning of June, immediately formed a consolidation channel and then continued to move up. I don’t know whether it was coincidental or just the chart “gods” doint their thing but when it hit 36.50 on July 12 it froze. It closed this past Friday at 31.86, substantially below the upper boundary resistance trendline of the ascending triangle at 34.00, the point where I bought.

What makes 36.50 interesting and important? It’s the exact same price, the all time high, that MWV hit back in March, 2002 a few trading days after it’s IPO! Wow, I think that’s amazing.

Perhaps I should have expected that since I’ve written before about the importance and the reliability of stocks that move into new all-time high territory, especially recent (or relatively recent, like 2002) IPOs. But here is a case of a stock that hit that high and retreated.

When the market regains its footing and starts moving back into bull mode, I expect MWV to also turn back up completing the formation of that “handle” (the cup, or double cup being the long spans I’ve labeled an ascending triangle). And the next penetration of the 36.50 resistance trendline will be permanent followed by a huge long-term up-trend.

My experience indicates that charts such as MWV often belong to companies that soon after the breakthrough end up being acquisition targets (or the breakthrough is as a result of an announced acquisition bid).

But this is all taking place within the context of a step correction in the overall markets. In the shadows of a credit crunch and concerns about the strength of the consumer and business spending.

Let’s see whether MWV will be taken over, if this chart isn’t violated and successfully recovers and ultimately breaks out on the upside.

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