With the stock market’s rebound from its September lows fueled by some of its previously worst performers, it does not make sense to chase any sector to the downside. However, identifying badly beaten stocks that are about to crack could set you up for fast profits in the near future.

Health care, the former market leader, has fallen on hard times since the summer. Unlike the broader market, it set a lower low in September. It then lagged as most sectors rallied in early October following a weaker-than-expected September jobs report that suggested the Federal Reserve would not raise interest rates this year.

Within that sector, diagnostic, imaging and surgical supplies maker Hologic (Nasdaq: HOLX) is a prime example of a stock about to crack. When it does, shares could quickly plunge more than 15%.

At first glance, the short-term chart seems disjointed, although support at roughly $37 is visible.

Momentum indicators are unremarkable, but relative performance versus the broader market is weak, as would be expected in a stock that is still trading near its summertime lows. In contrast, the S&P 500 is about 7% above its lows.

It is the long-term chart below that tells the real story though. 

#-ad_banner-#The highs of August and September form a rather clear double-top pattern with its distinctive “M” shape. Support for the pattern is the same as the short-term support identified above, near $37. In its simplest form, a breakdown below that level completes the pattern and triggers a sell signal. 

However, there are other factors at play. Price stability over the past few days suggests the stock is deciding whether it wants to make that breakdown attempt or bounce.

This is actually a welcome development for bears as a pause before a breakdown tells us it was a change in sentiment and not just momentum that sparked the down move. Bulls would prefer to see an immediate bounce off support because strong stocks do not linger at low prices to allow weak hands to buy comfortably. 

The rising trendline from October 2014 is already broken to the downside, leaving the 200-day moving average as the lone price line still holding for the bulls. But I would not bank on a bounce off any moving average when other technical factors suggest otherwise.

The double-top pattern also has confirming technicals such as a falling Relative Strength Index (RSI). This is a bearish warning before prices actually break. 

And Bollinger Bands also signal a top, as the August peak took place above the bands while the September peak was back within them. This indicates waning upside momentum as a stock transitions from bull to bear.

Should HOLX drop below $37, the pattern will complete and the sell signal will be issued. Based on the size of the double-top, the downside target would be near $30. 

For those trying to reproduce this measurement, it is the height of the pattern measured in pixels on the screen on a log scaled chart projected down from the breakdown point. I find this to be more accurate than measuring points and projecting them lower. That method sometimes yields overly aggressive downside targets.

The $30 area is also close to a 61.8% Fibonacci retracement of the one-year rally, strengthening the target. 

To be on the safe side, traders should wait for a drop below $36.75 to sell shares short. I am setting the downside target at $31, which would result in a gain of 16%. 

There is also another strategy that could allow you to make an 83% profit on that 16% move by risking just $600. To find out who is making these kinds of trades and how you can join them, follow this link.

Recommended Trade Setup:

— Sell HOLX short under $36.75
— Set stop-loss at $38.50
— Set initial price target at $31 for a potential 16% gain in eight weeks

This article was originally published on ProfitableTrading.com: This Stock Is Just A Few Cents Away From A Sell Signal