The chart below is of RGR (Sturm Ruger), a well known firearms manufacturer.
The fundamental backdrop for this stock and its industry is excellent – obviously driven largely by fears of Obama’s perceived anti-gun rights political leanings.
So, why then is the name off 40% in a mere month?
It could have something to do with line (1).
Every time the stock has tested this line as resistance in the past (and its only done so three times now) it has backed off materially in a compressed period of time.
July 2012 put options with an exercise price of $50 were trading at < $2.00 in May.
As of this time they trade just shy of $15.00 – that’s a gain of over 7x in a little over a month had one been using this historical framework for playing the name.
And that’s a great example of the power of technical analysis at work.