By: Steve Smith
A Baker’s Dozen: 13 Charts That Offer Good Risk/Reward Entry Points
Get the odds in your favor, on both bullish and bearish trades, by using charts to identify attractive entry points.
They say a picture is worth an inflation adjusted 1.7 million words. And as a certified technical analyst I always start with the picture. But whereas some TA mavens go nuts with lines and stochastic indicators end up with something looking like this…
…I try to KISS and just try to identify trends and basic support and resistance levels. I’ve found that simple moving averages works best for me. Since I’m working with options, which for better or worse are a decaying asset, I keep the time frame relatively short using 20 and 50 day moving averages. When the two are converging it suggests that could be a major suport/resistance/inflection point.
Below I submit to 13 charts, 6 bullish and 5 bearish, that are offering good risk/reward entry points as approach the 20 and 50 dma support and resistance levels. I’ll provide some comments, such as whether I’d use a debit or credit position and what the target might be, but for the most part they speak for themselves. But trading the the underlying shares works just as well if not better given well defined entry points. Buy or sell near the moving avarges and set a stop loss just below or above those levels.
Let’s start with the bulls
Morgan Stanley (MS)
Major support at the 50 dma at $35.80. It’s also forming a sightly bullish triangle with higher lows. I’m currently May $36 long calls.
Pollo Loco (LOCO)
I explained by bullish thesis here http://theoptionspecialist.com/2014/12/29/pollo-loco-longer-insane-valuation-2/ and was long into the March 16th earnings took some profits and then quickly rebuilt a bullish position using the June $28 calls. It’s been pretty frustrating since then as it just drifted sideways. I was ready to throw in towel if it closed below the 50 dma. But Tuesday’s bullish candle gives me hope that it will finally start running up towards the $30 level.
Health insurers have been good steady performers. Allstate’s chart has a nice uptrend still in place. I would look at using either call calendar spreads or bull call (credit) spreads to produce income as you ride this trend
Avalonbay Communities (AVB)
This is a REIT focused on multifamily rental units. As we know the trend is for millennials opting to move to urban centers and rent. And as long as interest rates stay low the 2.8% dividend is attractive and helps support the stock price.
Tractor Supply (TSCO)
Don’t let the name fool you; this is company sells to “gentleman farmers” and operates in much the same space as a Home Depot (HD) but with a focus on the outdoors such as landscaping and materials for DYI projects. Seasonal trends and an improving housing market provide a tailwind. As a U.S. based company it’s also insulated from negative impact of the strong dollar.
CVS Corp (CVS)
The drug store chain has been a steady performer. Some of the upward momentum is flattening out but I think it will hold the trend lines. This is a good candidate for a covered call strategy.
Sonic Corp (SONC)
This burger oriented fast food chain has rallied like I hope LOCO will. But the time to be a buyer here has passed. It went parabolic, posted only “in line” earnings and dropped like a hot tater tot. It is now firmly under resistance and likely to test the gap down at $28 level. For those that want to get fancy maybe try paring a long LOCO with short SONC.
International Paper (IP)
Commodity based companies have struggled for the past year due a cyclical down turn. IP’s problems extend into a more secular issue of the fact people are using less paper based products for packaging and storage of foods and consumer products and the digital age means less writing/reading material such as news and brochures. This stock can be shorted against the $55 resistance level.
Google has fallen out of favor as mobile apps have diminished the need for search. It has a lot of various moonshot projects in the works but nothing that can replace the online advertising revenue that is its lifeblood. The recent bounce back to the 20 day at $550 is a good place to start building a bearish position. Given the high dollar price of the shares and the space between the 20 and 50 day this perfect candidate for using put options. That will give you lower cost and defined risk while enjoying all the downside potential.
Gamestop has been in the target of shorts for years and they have mostly been hurt as the death of the physical retailer has been greatly exaggerated. The company has done well to navigate the transition to digital downloads by scaling back store size and cutting deals to maintain the high margin used game trade in business. Management kept the balance sheet strong and it pays a nice 3.8% dividend yield. But it’s time might finally be at hand. I just don’t see much upside. This is a great candidate for shorting stock and writing puts against it. Think of it as the inverse of a covered call.
Integrated Device Technology (IDTI)
I was actually very bullish on this name back in December http://theoptionspecialist.com/2014/12/02/power-portfolio/ and actually made some money on the long side. But I’m nothing if not flexible and this now looks like a good short candidate. The revenue for its core chip business is flat and the promise of the wireless power now seems a long way off. I can see this dropping back down to the $16 level.
As always do your own research but I hope this offers a good starting point for some trading ideas.