If you read this blog regularly, have read my book Sideways, or watch my BNN appearances – you will know that I favor certain trading patterns to time my entry/exits. My favorite pattern for a mid-long termed trade is to buy out of consolidation (which I refer to as a “Phase 1 bottom” in Sideways). A recent example of this would be the Japanese Nikki exchange—which I pointed out a few weeks ago on this blog.
I also like buying into an uptrend, but prefer to wait for a pullback and successful test of a trendline. I gave readers some guidance on trading the FANG stocks (Facebook, Amazon, Netflix, Google) when identifying and comparing stocks that are trending vs. consolidating back in September.
The final way I like to spot technical entry opportunities is to identify stocks that are trading range-bound. The trick is to buy on a bounce off of a floor of support, and sell at a ceiling of resistance. If you buy and then experience a downside break of support, prepare to sell out after waiting a few days. Please refer to my book Sideways for rules surrounding that loss limitation strategy. The bottom line is take a small loss and move on. A break of long-held support is bad news most of the time. Just ask DH Corp (DH-T) stock owners!
Conversely – sometimes a stock will break through overhead resistance, and move on to new highs. Traders could consider a mental stop loss if you see a stock break out. I’m inclined to just trade the range and move on, but that’s just me.
At ValueTrend, we have been trading Fomento Economico (FMX)– Mexico’s version of Alimentation Couche-Tard (ATD.B)—which, by the way, is not a range-bound stock. FMX, on the other hand, has been stuck in a trading pattern since 2013. The stock gyrates rhythmically between the mid’$80’s to just under $100. It has not broken out of this trading zone for 3 years, and there is no end in sight for the pattern to end. While disturbing for the long termed investor, FMX offers a beautifully predictable pattern for traders. We recently exited our position in the stock at around $98 (after buying at $88), and are looking to buy back in if it gets back into the high $80s.
Here in Canada, we have a few sideways range bound stocks worthy of consideration for the adept trader. Stantec (STN-T) has been stuck trading up and down between the high $20’s and the mid- $30’s since late 2013. It’s at the bottom of that range right now.
Cogeco (CGO-T) is another Canadian name that has been stuck in limbo since 2014. Buying at just under $50 and selling in the mid-high $50’s has been a wonderful opportunity for those who like a quick & profitable trading plan.
Keep the sell discipline mentioned above (more details in my book) in mind when trading these patterns. A breakdown of support from a long-held pattern is bad news for a stock.