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!
Restaurant Brands International (QSR-t) is one that I’m following though I’m not sure it meets the definition of a true consolidation pattern anymore. From my analysis, It broke out of its two year consolidation pattern early this year and is now back testing where it previously broke out from (now its support). Hoping it holds and bounces back up to $105 (which will then make it closer to a consolidation pattern once again)!
Yes your analysis agrees with ours, we’ve been watching the test to see if it can hold before buying but its on our watch list. Thanks Josh.
Another one is Chartwell Retirement Residences (csh.un) which is at the bottom of its 4 year consolidation pattern. In my opinion, it’s a bit concerning though that it seems to have underperformed the REIT sector this year.
Thanks Josh–yes, you need it to show it can bounce off of that (roughly) $14 support area. I’d be inclined to go in slightly higher than try to catch the low, just to be safer. Its been moving down out of sync with the sector as you mention.
Energy I notice has broken $60 and in fact is over $61. Is it safe to start looking energy stocks or do you think this a head fake.
I like oil–we bought a 2% position in an energy stock recently. We look to buy more oil over the next few weeks. There is a seasonal tendency for a bit of weakness in oil in the January, but it doesn’t always happen. So we will step in a bit at a time to be fully into the position we want by some point in January.
What is the seasonal period for the US Financials. I looked at equity clock and it says a sell date of January 3. I have also seen April as a sell date.
Thackray’s guide (which contains research going back further than Equity Clock) says April is sell date.
I bought a small position in TECH. Is it a sideways stock? Mostly it has been in a downtrend but has established a support at about $20 and the downtrend has been broken and a short term uptrend has begun. And, all the momentum indicators seem to agree. Stockcharts seasonality chart shows a positive trend until March (60%, 80%, 60% and 60%). The upside potential is significant.
Fred–not so much a sideways stock but nonetheless–that breakout though the last point of resistance in the $215-ish zone is very encouraging–its looking bullish so far, methinks.
MTYFood Group Inc. (MTY-T), ready to break out soon after $72 (Jan./19) , $54, $66, $52,, currently around $55?
Ross–the chart seems to be making lower highs and lower lows on the weekly chart. It isn’t so much a sideways chart in my view.
What time frame is relevant for a sideways pattern? EPD Enterprice Products Partners has a clear $ 24 to $ 30 range started in 2016 but in looking at a one year chart you would not consider it as going sideways. As well a nice dividend as you wait for the gyrations.
Good question David. The time frame for us is at least a year of sideways action. But that does not imply that its the time frame for you. If you like making shorter termed trades, you will want to look at shorter horizons of sideways action on a daily, rather than weekly action.
Tricon Capital Group (TCN).
Hoping to step into this when it reaches support around 10 dollars plus your 3 days to confirm uptrend. What to you think Keith?
We haven’t done any fundamental work on the stock, but technically I have been looking at it. Somebody on my BNN show asked about it and it reminded me to keep it on my screen. I do agree with you that support lies around $9.60-$10. Any rebound off of that price zone would be very encouraging. Right now its stuck in the middle, so I for one am inclined to wait.