Gil Morales and Chris Kacher

After the market plunge in early August this past year, a period of heightened volatility and risk has reared its ugly head with no end in sight.  This heightened volatility has reached levels not seen since the flash crash of May 2010, with the end result being a whipsaw market that is very much a “chop zone.”

At times we have considered that this current environment is more a “market of stocks,” i.e., a stock picker’s market, rather than a “stock market.” And in such a market, there are opportunities for those who know where to find them. There is no question that certain leading stocks have split wide-open since the market’s break off the late July peak, and we at have identified some material profit opportunities in individual stocks that had close-to-perfect technical set ups on the short side, and were well profitable, even in this highly variable environment. One of our favorite formations is the “head & shoulders” formation, a pattern that investors should be aware of during environments where former leading stocks have begun to falter. Historically, leading stocks have often formed such a pattern before rolling over for good and plumbing to new lows.

For example, Green Mountain Coffee Roasters (GMCR), shown in Chart 1, was one such set-up as it formed a clear head and shoulders formation, as we’ve outlined in the chart. The stock is shown in Chart 1 at the time that the initial short signal was given as the stock was rolling over in the right shoulder of the formation with selling volume picking up sharply, as can be seen in the chart. GMCR paused briefly at the October 4th low before ultimately plunging below the $40 price level. The stock has since bounced and as of the time of this writing was trading at around the $50 level, still well below where the original sell signal in this head and shoulders formation occurred.

Chart 1 - Green Mountain Coffee Roasters, Inc. (GMCR) daily chart, October 2011. Chart courtesy of eSignal, Inc. © 2011 used by permission.

Netflix, Inc. (NFLX) was another stock we were able to pick off as it gapped-down through the neckline of a head and shoulders topping formation, shown in Chart 2. In this case the huge selling volume seen at the time of the downside “breakout” through the neckline was a short-selling signal.

Gil Morales and Chris Kacher

Gil Morales and Chris Karcher are co-founders of the Virtue of Selfish Investing.