In my “Technically Speaking” analyses, I’ll take a look at up to three stocks that have entered into either an overbought or oversold condition. Using a combined strategy focusing on RSI and MACD as my leading indicators, I work to identify short-term trading opportunities that have the ability to catch a tidy return from an anticipated snap-back correction.
While company-specific news is always going to be the prime driver of a stocks trading pattern, it is also true that the market is quite imperfect when it comes to the valuation of a stock, especially when emotion takes the better part of discretion. More often than not, these imperfect analyses lead to the price of a stock being mis-priced, sometimes too high and sometimes too low. These inefficiencies, however, provide investors with an opportunity to cash in on quick and short-term opportunities.
Keeping in mind that this column is designed for short-term trading, maintaining the discipline to take a profit when the trading objective is met is crucial. I rely less on near-term data and more on the likely trading patterns for the next 72 hours. Although technicals are an imperfect measure, they do allow an investor to step aside from the emotion that ultimately plays a significant role in whether a trading strategy is ultimately successful.
The “Technically Speaking” plays are intended to recognize stocks that have a high probability of a 10% – 20% snap-back rally. It is up to the investor to follow the discipline required to exit the trade once the objective is met. In some cases, the focus on discipline and strategy may cause an investor to not enter a trade at all, especially when the initial price objective of a trade is not realized. After all, market’s will not always cooperate with a trader’s plan.
A Quick Lesson In RSI
A valuable tool to measuring the trend of a stock is the Relative Strength Indicator, commonly referred to as the RSI. The RSI trades in a range of 0-100, with a reading over 70 generally indicating that the stock is overbought and is likely to retrace from the current levels. Conversely, a stock trading with an RSI of less than 30 generally indicates that a stock is oversold and is likely to bounce higher from current levels. The closer the reading to either the 0 or the 100 level, the stronger the signal for the investor to consider. But, simply because the RSI is above 70 or below 30 does not mean that a trading opportunity is ripe based on the RSI alone. That’s why I use a combination strategy.
Investors need to understand in no uncertain terms that trading strictly on RSI levels is a quick and almost surefire method to lose your money. Trading, by any stretch of the imagination, is not that simple. In finding a confirmation of an RSI signal worth paying attention to, investors need to factor in volume, double bottoms and tops, and the quickness of the move in the RSI.
The RSI is a great tool and using it in combination with the MACD allows the signal to become even stronger.
A Quick Lesson In The MACD
The Moving Average Convergence Divergence (MACD) signal is a powerful tool in and of itself. However, when combined with the RSI indicator, the signal is better confirmed.
The MACD is regarded as one of the simplest and most effective momentum indicators available to traders. The MACD follows two trend indicators, which are known as moving averages. The MACD reflects the momentum of a trade, taking into account both the longer and shorter moving averages and scores them into a single oscillator. The blended average provides traders with a read on both momentum and trend and provides a signal based on a crossover signal on a baseline scored at zero. However, be careful – the MACD is designed to provide a signal and should not be used to determine overbought and oversold conditions on its own. For that reason, I like to combine the RSI and MACD together to produce a more reliable signal.
Keep in mind, trading on technicals does not guarantee a successful trade. As always, stock specific news tends to trump all technical data and can reverse a trend instantaneously. For traders that want to take advantage of “Technically Speaking,” it is important that you follow three basic rules:
- Set your goal for the trades and be realistic in your strategy. 10% return is great for three days work.
- Allow a technical trade to exist for 72 hours. If the signal has not stayed intact, exit the trade.
- No trade, no problem. Sitting on the sidelines in an uncertain market or with a volatile stock is never a missed opportunity. If an investor lacks confidence in the trade, they will most likely fail to employ the necessary discipline required to open and close the trade successfully.
With that brief introduction to the “Technically Speaking” analyses, let’s analyze three stocks that have met both of my primary indicators – an RSI below 25 and an MACD trading at or below the 0 baseline. Each represents a near-term trading opportunity.
BioScrip (BIOS) is a leading national provider of infusion and home care management solutions. BIOS partners with physicians, hospitals, nursing facilities, and pharmaceutical manufacturers to provide patients with post-acute care services.
On November 8th, BIOS reported a quarter that was met unenthusiastically by investors, sending the shares down by over 47%. Although the earnings were not what the market wanted to hear, from a trading perspective, an opportunity has emerged.
First, the RSI(14) was trading at a very low 12.18 at the close of trading on Tuesday. This is well within my signal target of a reading lower than 25. The MACD is also trading below the baseline at a reading of -.062. With both levels well within my technical signal parameters, BIOS is likely to offer a quick snap-back opportunity as the stock corrects to a more normalized level.
At the end of Tuesday’s trading, momentum of the MACD indicated a move back toward the baseline, showing signs of reversing a downtrend that had been in place for the last thirty minutes of trading. The RSI traded down to its lowest level of the day by closing, offering a weak buy signal on its own. But, bringing in the MACDH is where I found the signal.
With the RSI sitting at extremely oversold levels, and with the MACDH showing signs of reversing the downtrend, I anticipate that Wednesday will offer a strong trading opportunity. However, there is no need to execute the trade on the opening bell.
While I expect that BIOS will provide the buy signal in the mid morning session, I also expect BIOS to trade lower at the open and then offer investors an opportunity to purchase shares at the $1.15 level. The RSI should follow the stock lower to a value of roughly 10, and the MACD will signal additional downside pressure. However, after the first low is taken out, I anticipate a correction to the upside, with a target of $1.60 as my exit point, providing a trough-to-peak gain of 39%. Trade duration for these signals to occur is 72 hours. Remember, trade in and trade out. Meet the objective and settle the trade.
Hertz Global had a rollercoaster day on Tuesday, trading as low as $17.00 a share before ultimately settling at $27.70 a share. HTZ reported unsettling quarterly results and investors responded violently, sending shares sharply lower before recovering on news that Carl Ichan has doubled his stake in HTZ by purchasing shares at an average cost of $23.83 per share. While news typically trumps all, special circumstances also deserve some attention. In this case, the technicals, coupled with the Ichan news, offer an enticing opportunity to capitalize on a confused market. Earnings bad, Ichan good.
At the close, the RSI stood at 19.55 with the MACD weakening into the close and settling right at the baseline for the day. The two indicators are now in sync to set a new trend once the final trades and early morning momentum traders move out of the way. Technicals point to a slightly lower open with a quick reversal to the upside, starting an uptrend from what I believe will be the $27.40 level. My exit for this trade is set at $31.00 a share, representing a short-term gain of 12.73%.
HTZ may demonstrate some battleground tendencies, with shorts and longs battling it out for position. With the Ichan stake, the technical pattern may be repeatable as the two sides of the trade battle it out for the overall sentiment, and I would continue to rely on an RSI of 19 and a MACDH at or below the 0 baseline to remain interested. Stay disciplined, this trade is designed for a 12%-15% return, not 30%.
CVS Health Corp.
CVS got crushed on Tuesday after reporting increased profit but offering weak guidance for 2017. Shares got stung by over 11% on the day, recovering from the intraday low of $69.30 to close at $73.53, down $9.83 on the day.
From a technical perspective, CVS will offer an opportunity, but investors can use this stock as a test of patience and discipline. I anticipate that CVS will continue lower in the morning session before stabilizing just above $72.00 per share.
The RSI closed at 20.91, and the MACDH shot a big candle downward at the close, demonstrating some strong selling by exhausted longs at the end of the session. Based on the pattern at the close, my analysis indicates an opportunity to open a position at $$71.00 a share with an exit point set at $77.00 per share, a gain of 8.45%. I have a 72-hour duration for this trade. If the stock does not trade down to $71.00, I believe the rally will be short-lived until it does touch that level.
Investors need to be cautious of the macro conditions surrounding not only the markets, but around the world. With the U.S. presidential election decided, investors will next focus on any and all scenarios that could provide uncertainty for the markets moving forward. As it stands right now, the market does not want to see a Trump victory, with the futures plunging in excess of 750 points as of 10:30 p.m. EST. Whether or not you are a Trump supporter, the market reaction, both here and abroad, shows the disconnect between the citizens of the U.S. and the money centers. With investors not being able to distinguish political rhetoric from reality, the path of least resistance is to run first and ask questions later. However, this is the kind of market that plays well to technical trading, as investors don’t necessarily need to pay as much attention to stock price as they do to technical indicators.
With that said, though, investors should be cautious and take a moment to gauge the results of this election and the short-term impact that it may play on the market averages.
As for BIOS, HTZ, and CVS, let the markets open and gauge the sentiment. If the market trades lower on election results, these three stocks will likely follow the trend, and the technical indicators will stay intact to execute the trade once the market catches its breath. Remember, if a trade does not hit the parameters established, don’t execute the trade. There will be plenty of opportunities in this market, a market set to be extremely volatile in the days and months ahead.
Despite who wins the election, the market may react irrationally in the next few days. No investor ever went broke taking a profit, and no investor ever went broke by sitting on the sidelines for a short period of time, either.
This is a market that should offer investors an opportunity to perform well by taking small bites one at a time. Greed is good in the movies, but greed has made more people poor than rich. Tread carefully.
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