Headlining the front pages of mainstream business media is yet another record-breaking performance by U.S. financial markets. In particular, both the S&P 500 and the Nasdaq closed at all-time highs on Friday, April 24, thanks largely to earnings forecast-busting showpieces by tech giants Google Inc. (NASDAQ:GOOGL), Amazon.com Inc. (NASDAQ:AMZN), and Microsoft Corp. (NASDAQ:MSFT). Not making that illustrious list, however, is San Diego-based Maxwell Technologies Inc. (NASDAQ:MXWL), which dropped nearly 12% of equity value in just one day. Was this an anomalous event for the energy storage and power delivery systems provider or is it a sign of more pain to come?
Maxwell stock has the makings of a Rocky Balboa movie: first, the protagonist takes an unholy — and far too unrealistic — beating in the ring. The general public abandons the cause, leaving our hero with no one to depend upon other than his loyal support group. Slowly but with great determination, a comeback effort is staged. Hollywood works its magic and the audience is given the feel-good story they paid to enjoy.
Back to the Nasdaq, Maxwell has been handed an Ivan Drago beatdown and it will not be getting up in time for the count. Based on the company’s 90-day lagging average performance, MXWL shares have a 42.5% chance of recovering over the next three months. If the stock beats the odds, the average gains are a lofty 16%. However, should MXWL trade according to its probabilities, average losses amount to 21%. The magnitude of risk, therefore, is significantly higher than the reward potential, which makes this a very stupid trade unless you were short the company.
Technical Analysis Disciplined
But how short should one be with Maxwell? Under most circumstances, statistical analysis can be relied upon with a high degree of confidence. But with MXWL, shares are almost done forming a head-and-shoulders pattern, which has bearish implications for adherents to the technical analysis discipline. Should the pattern complete itself, expect shares to test the $5.00 support line that formed at its base during the early months of 2013. The test should occur by July, which means that those who want to risk shorting MXWL should so with a very tight timeframe in mind.
Why? Typically, after the completion of a head-and-shoulders pattern, bullish money reenters the asset, driving it forward after the weak-hands have been flushed out. It’s not a guarantee and quantifiable evidence of such an assertion is lacking, primarily because there is debate about what constitutes an authentic technical pattern. Nevertheless, Maxwell’s relatively high beta of 1.82 hides the fact that when things go right for its stock, it does so with overwhelming fanfare.
It’s certainly not a buy right now but at the right price, this stock has serious knock-out power!