I like stocks that are trading sideways. In fact, I like them so much that I named my Technical Analysis book after the pattern (Sideways: Using the power of Technical Analysis to Profit in Uncertain Times). Consolidation patterns often occur after a period of above-average returns. The consolidation returns the stock or sector to its mean return. Some call this “regression to the norm”. I call it “opportunity”.
The beauty of sideways patterns is that you can trade them in a relatively disciplined manner. If the stock or market is trapped in a sideways pattern, we can trade from the bottom (support) to the top (resistance) of the pattern. If the pattern has broken out to the upside, we enter after a few days to confirm the breakout. Hopefully, readers of my blog know that you don’t buy a stock or ETF that has broken out of a sideways pattern on the downside. Again, refer to my book Sideways to brush up on this (and other) technical rules if that isn’t part of your discipline.
Let’s take a look at 4 stocks that fall under our first category. That is, they remain trapped in a sideways consolidation with a defined ceiling and floor.
Amazon has a lid at around $2000, and a floor around $1700. This is the trickiest of the stocks I’ll note on today’s blog. Buying off of the bottom hasn’t worked so well of late. It hasn’t made any moves to bounce off of support. However, if a trader likes the fundamentals and has patience, it might be worth a shot. Clearly, the stop point is below $1700.
Waste Connections has a floor around $117, but has a declining series of peaks. This makes the stock look to be consolidating within a right angled triangle. Often, these formations break out hard (up or down). We own a small piece of this stock in our Equity Platform on that potential. Clearly, the stop out point is below $117. The upside is less defined within the pattern, given the declining peaks. Thus, entering this stock is an act of faith in the fundamentals. We feel that the support line offers a defined stop out risk point, so we’re willing to wait and see if our fundamental call on the stock proves correct. If the pattern breaks support, we will be out of the trade.
Stantec has been trapped between about $27 to $36 for 5 years! The big spike in November pushed the stock into the top of its range again. Will it break out? We shall see.
Boeing goes “boing”. Its back to the bottom of a very defined trading range. Is it a buy? Well, the company does have some issues…But, perhaps those problems are built into the price…..? If you do take the trade, watch that support is held and prepare to exit if it breaks $310 or so. We’re not in this stock.
All of these stocks are currently trading in consolidations and have not broken out yet. Thus, the setup is to wait for a return to the bottom of the pattern before buying, with a sell target set at the top (resistance) point. A smart stop-out point will be below support.
Or, a bullish move would be to buy on the breakout. In this case, your stop out point occurs if the market falls back below the breakout point (former resistance. Again, use a minimum of three days in each of these trigger points before buying or selling – per my book Sideways.
Now let’s look at two ETFs that were trading sideways until they broke out. We hold positions in both of these securities in our Equity Platform. Sell targets differ for these stocks. IWM (Russell 2000 ETF) has an old high of just over $170 that needs to be taken out. Basically, I tend to let stocks with no overhead resistance run as long as they trend up. When there is resistance – as seen with IWM, I’ll wait to see if the stock or index can break the old high. If it fails (again, using the minimum of 3 day rule), I’ll sell.
XLI (Industrial sector ETF) broke out recently. This ETF has no overhead resistance. So the position can be held so long as the breakout holds and trend continues.
Do you have any consolidating stocks or ETF’s you are following? Love to hear of them. Share them on the comments section below!