On August 31st, we highlighted a bullish play in shares of Campbell Soup (NYSE:CPB) on OptionInvestor.com and IndexSkybox.com near $28. No, it wasn't the technicals, but a long loved trade of mine based on "seasonality." The months from September thru November was a great time to invest in the stock as the cold winter months were on the horizon. With snow yet to fall in the lower plains against the great Rocky Mountains, we look to the top of the peaks and see a skiff of snow. But look! There's a peak forming in Campbell Soup too!
Campbell Soup Chart -
Campbell Soup (CPB) is one of those trades that just makes sense. The onset of winter and a bowl of hot soup! There's nothing better in the duck blind on a blistery winter day either! Helps stabilize the retirement account in those cold winter months. So far so good from August 31st close of $28.19. Look for some consolidation near the $30.96 level of retracement. Snug your stop under $29.50 and look to sell the potentially increasing earnings report from seasonal soup sales near $33. There's more exciting ways to make a buck or two, but hard to find those that have the same type of seasonality and rather predictive price performance of CPB.
Technicals still hint bearish for Insurance
Some subscriber e-mail has sign of worry and wonderment regarding Insurance Index (IUX.X), but recent rally back near bearish resistance has little changed regarding the point/figure chart of the index itself.
In late October, Eric Utley found what appeared to be the formation of a triangle pattern forming in the index. A trade at $700 would have triggered a "bearish triangle" and a trade at $735 would have triggered a "bullish triangle" Eventually we witnessed a trade at $700, giving us a bearish posture toward the index.
Over the next couple of session, the index fell to a low of 678, but has since rallied right back to the "apex of the triangle" and just below bearish resistance. Traders looking for a good risk/reward trade to the downside, should be looking here as risk/reward is favorable for a bearish trade.
Insurance Index Chart - $5 box
The resulting column of O's from the triangle give us the "sell column" for establishing a bearish price objective of $630. Some technical analysis of the chart shows the bearish resistance trend (longer-term trend based on point/figure charting) at $730. There's an old saying among point/figure chartists that the first test of bearish resistance is often times most painful for the bulls. A "buy signal" would occur at $730, and this remains our stop based on previous work when pointing out the original "bearish triangle." In essence, the index has rallied back near, but not triggered original profiled stop.
Sometimes I get in a trade that I end up not liking. Perhaps the broader market was stronger than I thought. Perhaps a new and unexpected development took place where my original scenario is now invalid (neither of these are the case as I see it relating to the IUX.X). When I do get in a trade I no longer like the current outcome, I look to stick with original plan (keep stop where it is) then look for a level where I either exit at break- even or slightly profitable. The "exit at slightly profitable" is a level where I look for any type of technical bullishness.
The first level to be looking for technical bullishness is the recent reversal level near $680, from there I look at the $655 level.
Is the index stronger than the market?
I often talk about how important it is to assess the broader market and sector when looking to trade a stock. In the Index example, I want to try and understand what happened and what is happening. Is the Insurance Index (IUX.X) stronger than the broader market as characterized by the S&P 500?
Relative Strength of IUX.X vs. S&P 500
The relative strength chart of the IUX.X is currently in a column of O's (weak) vs. the S&P 500. The point and figure chart gives traders a unique way to view relative strength, rather than a squiggly line on a bar chart that only tells them if RS is going up or down, but not really giving much insight to point RELATIVE to past levels of trading.
Right now, we'd say, "the RS chart of the IUX.X is on a buy signal, but in a column of O's." In essence, the IUX.X has been outperforming the S&P 500 over the LONGER-TERM, but is currently under performing the S&P 500 SHORTER-TERM. Traders that have traded for awhile have learned that sometimes, the short-term leads to a longer term trend.
Hmmmm.... now that has one reviewing the basic point and figure chart of the IUX.X and that "nasty" looking bearish resistance trend at $730. A trader is perhaps thinking.... "what shape will the IUX.X be in if it gives a sell signal on its RS chart?"
I might argue, the reason the IUX.X has rallied the past three sessions, is because the MARKET (SPX.X) has rallied. The RS chart gives hint that the IUX.X is still under performing the SPX. I don't want to be looking bullish sectors that are under performing the broader market. True, you can buy just about anything in a raging bull or rallying market and make money. It's when the broader market turn negative that a bull following that discipline finds himself in trouble.
For now, I do not see a reason to "fret" the action from the IUX.X. I'd rather be short the index than long it. If the IUX.X breaks above the $730 level, then I must admit my mistake and follow with a stop. If I'm feeling sideways at $720, then I probably should not have been short/put to begin with or should have been following a bearish trade at $700 with a tighter stop or trading a lighter position.
Trader's that think like this
I've gotten a lot of e-mail from subscribers looking for a strong sell-off after today's FOMC announcement on interest rates. For those that are, then I'd want to be looking for stocks/sectors that have under performed the market on the upside and looking to short weak sectors that have rallied near resistance. Then if you're right and the market does sell off, you've increased your odds of establishing a soon to be profitable trade. However, if your wrong and the market responds favorably to the FOMC decision on interest rates, you may have lessened the blow to your account as the group of stocks your short has lagged the prior bullishness. Give me a choice between losing 5% or 10% and I'll take the 5% loss every time. It's easier to offset 5% losses than it is 10% losses.