By: Chris Rowe — January 4, 2011
2 Bullish, 2 Bearish Trades for 2011
Every Tuesday (the day I write for The Tycoon Report) I will list one or two "test your knowledge" technical analysis questions before the article, and after the article I'll list the answers. I hope you find this fun and I hope it helps you make more trading profits. Sometimes small bites can have a huge impact.
Technical Analysis Question/s of the week:
What is the K-Wave -- aka. "Kondratieff wave"?
It's a difficult time to find great charts in this market, for one reason and one reason only: The market is way overbought!! You don't want to buy at the top, but nor do you want to step in front of a train, guessing it's going to reverse at exactly the right time (if that were even possible).
Overbought doesn't necessarily mean over, but I'm seeing so many signs of a top ("leading" indicators -- and we don't want to get too bearish before confirmation of a bearish reversal).
I've discussed some of those signs in The Tycoon Report, and in even more depth with members of The Trend Rider, my options trading service. In that service, I play both the bear and bull sides to stay hedged, so I'll show you a couple charts that I think look bullish, and a couple that look bearish, and let you be the judge of whether to take one side, the other side, or BOTH sides!
Depending on your style or comfort level, both sides might be played, because we are in an overbought market that is still trending higher (and we don't want to fight the trend -- but we do want to play for good prices). Stop loss prices are also found below to limit losses on those that go in the wrong direction.
Please note that there are three or four times as many things that I could point out about these charts, stocks and sectors they are in. But here, I'll keep it basic.
Also note that these are short-term trading ideas where odds favor a move in the specified direction of about 15% - 20%. They aren't long-term holds as of now, due to the market conditions described above. These positions will NOT be updated. Feel free to adjust (tighten) your protective stop orders as you see fit. I'm not recommending options on these positions.
Finally: Please be sure to consult with your broker or financial professional -- and not Tycoon Publishing -- on questions about how to enter trades, etc. We are not allowed to give you personalized investment advice, and we will tell you to consult your broker if asked. Those are the rules.
BULLISH CHART 1
Advent Software Inc (Symbol: ADVS) has been on a tear. It looks like a buy if it pulls back to $56.30. In a recent article, I discussed channel exhaustion patterns and consolidations. This looks like a stock that wants to go higher and accelerate its upside momentum, but needs to consolidate sideways a bit or digest its fast move from $52.00 to $59.00.
You can see all the big green volume bars below the price chart indicating heavy buying, which is necessary for a true breakout. The stock is pulling back today on LIGHT volume, which is good for bulls.
There is an RSI sell signal we don't respect, as the stock is in an up trend and there is no negative divergence in the indicator.
The ADX (bottom indicator) shows a very strong up trend. Chances are, after consolidation, this stock will continue higher, as it just broke its 2007 high.
I don't know how high it can go, as I would have to watch it as it evolves. But this can inch its way up to the $80s, especially if the general market continues to be a bull market.
STOP LOSS: Since this is a bullish position, the position would be a long position. Therefore the protective stop loss order would be a protective SELL STOP order at $54.00.
BULLISH CHART 2
Buckeye Technology Inc. (Symbol:BKI) is another stock ripping higher very fast, and on strong upside volume with low volume pullbacks.
I think it's a good buying opportunity at $21.00, with a trailing protective stop loss order at $19.00. If the market cooperates, it can move up to $30.00 -- especially if the general market helps. I say "especially" in this case because if the general market charges higher in the overbought state that it's in, it's going to be the high flying stocks like this one that will likely see the most explosive gains.
You can see the stock in the middle of a BIGGER channel, where the lower trend line started in August/September after breaking the return line (upper channel line) of the original channel, started at the same time. This is another sign of strength.
STOP LOSS: Since this is a bullish position, the position would be a long position. Therefore the protective stop loss order would be a protective SELL STOP order at $19.00.
BEARISH CHART 1
Republic Services Inc. (Symbol: RSG) looks a bit overbought. It already proved that there is resistance at the old up trend line from June to November. Once that up trend line was broken, it tends to reverse roles from support to resistance.
There is also a horizontal key price point of $30.00. While it attempted to move above that level, it is having a very hard time staying above it.
The stock also made a decisive move below the 10-day moving average (purple line in price overlay), and is also having problems staying above the key 200-day simple moving average.
A MACD sell signal occurred in the last trading days of 2010, and on December 14, 2010 we saw an RSI buy signal.
The stock will most likely pull back to at least $29.00 (which is a minimal amt.), but will more likely move down to $26.00. If the general market tops out and corrects, however, this can get down to $22.00.
STOP LOSS: Since this is a bearish position, the position would be a short position. Therefore the protective stop loss order would be a protective BUY STOP order at $31.50.
BEARISH CHART 2
Checkpoint Systems Inc. (Symbol: CKP) looks overbought after a recovery from a sharp sell off in early November from $22.00 - $17.00. This is one that can be "saved" by the general market if it rips higher. But it has a good reward:risk ratio as a bearish position because, as you can see, it will be a solid breakout if it breaks the upper part of the symmetrical triangle (the down trend line -- connecting the April 2010 high to the October 2010 high in the daily chart -- and going way back to the 2007 high in the weekly, longer-term, chart). Therefore, you will know if we are on the wrong side of the trade pretty quickly.
A protective buy stop order can be entered at $22.60 to limit losses if it moves in the wrong direction (up).
The heavy volume buying in mid November and early December was most likely short covering from the sharp sell off in early November. You can see that the volume dried up after the quick advance from $18.00 to $20.00, which indicates sellers merely moving out of the way for higher prices (as opposed to buyers bombarding the supply side with heavy buying).
An old up trend line was broken during the sharp sell off, and can now be considered resistance as opposed to the old support -- and you can see that resistance was already respected in early-mid December. That resistance coincides with the massive down trend line that goes back to 2007, and was tested twice this year already.
If the market tops out and corrects, this will probably get knocked down to the lower up trend line, which seems weak and not steep (connecting the February, July and November lows). It's not even a true trend line because, after the first test, the stock didn't make higher highs. I call it a trend line in the context of the symmetrical triangle's lower trend line.
If that line is violated, the stock can trade down to $14.00, so we are looking for a move to about $17.50 or $14.00.
STOP LOSS: Since this is a bearish position, the position would be a short position. Therefore the protective stop loss order would be a protective BUY STOP order at $22.60.
Answer (to TA question from above the article):
The 50-60 year cycle -- affecting the structure of the future of the world economy.