Here is a trading puzzle to work on while you have your morning coffee and after you are done reading the National Enquirer (breaking news today – Britney has been piling on the pounds). Try to figure out which stock I'm talking about.
I've focused on a certain stock that hasn't drawn a lot of press lately. But its chart pattern caught my attention. Sooner or later, every stock pulls back. This stock recently went through a bout of profit-taking.
But it recently rebounded on above-average volume, retreated on lower volume, and now may be setting up for further gains. I like that higher low in late February. If you look at the weekly chart, you'll find it retreated back to the 50-week moving average and appears to be staying above the MA. The stochastics indicator on the weekly chart has generated a ‘buy' signal.
I prefer to see greater evidence of accumulation in the stock. The volume pattern, the On Balance Volume indicator, and the Up/Down Volume Ratio so far are not indicating strong accumulation (which I consider to be the footprints of institutions).
But along with the higher probability chart setup above, some fundamentals stood out to me…
This stock has been steadily increasing revenues as well as earnings:
Aside from the earnings growth rate you see in the table above, this company sports a 35% Return On Equity (ROE). Institutions love to see ROE's up in that range.
The number of funds holding this stock has been steadily increasing:
On December 13th, one Director purchased half a million dollars worth of the stock (at $76.43 per share) and has held on to it. Back on August 19th, another Director purchased a million dollars worth of the stock (at $70.60 per share) and has held on to it.
Many of the other Directors appear to have exercised stock options, which is typical compensation in companies like this. The unusual thing is they didn't immediately sell the exercised shares. That is not typical. As recently as February 2013 they were regularly exercising and immediately selling shares. But they stopped doing that later in 2013. They are holding onto their shares. It seems a number of Directors may have faith in the near future.
Of course I look for a strong seasonal chart pattern, a track record of likely recurring institutional participation in this stock, this time of year.
This stock has a strong track record for the next 5 weeks, leading out through 16 weeks from now:
Option traders might be interested in the above track record. Lots of years with 6%+ gains.
Let's say we were prescient enough to have purchased this stock this time of year in every past year, sold it 5 weeks later, and we adroitly managed the trades with a typical 8% stop-loss. Over the 21 years, we would have averaged 12.4% on every winning trade, 7.5% on every losing trade, but we had 3.2 winning trades for every losing trade. The worst-case drawdown was only 16%:
I will be considering buying this stock at the open, if certain conditions are met. I also will be using certain parameters for trade management, in order to increase the chances of success for this trade.
I cover it all in today's Seasonal Forecaster newsletter. But I'll post an update next week and tell you the stock.
Of course, there's much more you need to know and many more stocks you can capitalize upon each and every day. To find out more, type in www.markettamer.com/seasonal-forecaster
Copyright (C) 2014 Stock & Options Training LLC
Unless indicated otherwise, at the time of this writing, the author has no positions in any of the above-mentioned securities.
Gregg Harris is the Chief Technical Strategist at MarketTamer.com with extensive experience in the financial sector.
Gregg started out as an Engineer and brings a rigorous thinking to his financial research. Gregg's passion for finance resulted in the creation of a real-time quote system and his work has been featured nationally in publications, such as the Investment Guide magazine.
As an avid researcher, Gregg concentrates on leveraging what institutional and big money players are doing to move the market and create seasonal trend patterns. Using custom research tools, Gregg identifies stocks that are optimal for stock and options traders to exploit these trends and find the tailwinds that can propel stocks to levels that are hidden to the average trader.
Also on Market Tamer…
Follow Us on Facebook