As part of my swing trading strategy, I focus on finding stocks with strong catalysts and strong technical setups. This hybrid fundamental and technical strategy has served me well in the past. It helps me to maintain profitability year over year in choppy markets and strong markets alike.
One of the best examples I have come across and traded can be seen in Best Buy (BBY).
So, what about Best Buy? What alerted me to this trade idea was my Earnings scanner that I use to keep an eye on earnings beats and misses. Best Buy, reported on March 3, 2015 and had good numbers. They eventually announced a dividend and share buyback program as well. This is the type of catalyst we like to see. Strong financial confidence from the company itself.
The next thing we need to determine is, a technical entry on the chart using a daily timeframe. What I saw on the Best Buy daily chart was a nice curl and continuation of an uptrend following earnings. We got candle over candle confirmation, and a slow steady move up to a major technical resistance level at $40.00. Why was this area major resistance? It was the recent high in the past 52 weeks. That $40 area was tested over 5 times and failed each time.
Why did it fail to breakout over that area? It could have failed for a variety of reasons, lack of a catalyst, a weak market, over extension and any other number of factors could have contributed to the failed breakouts at that level. This time was different, we had exception financial information that had been recently released and a solid outlook on company performance going forward. This was the time to buy.
I alerted a long entry just before the breakout at 39.25 or so. The next area I was looking to was that $40 area. I wanted to add to my position in the trade, but by scaling into strength. I wanted to see that $40 area fall and hold up. Once $40 came and went, I double my position in the trade.
In an earlier article, I spoke about the purpose of trading strong stocks in a top heavy market. As could be expected, we got caught in a SPY pullback. But, we were buffered from potentially large losses in this trade. This was a direct result of the fact we were trading a strong stock with a strong catalyst. Even though, the markets came in, we continued to hold that $40 level on Best Buy and climb even deeper into profitability.
Another example can be found in my recent Sprint (S) trade.
This was another nice technical setup coupled with a catalyst. On the Sprint chart, you can see that even through this market pull back, Sprint continues to fight and hold that key technical area of $5. The catalyst here was the CEO buy back of his company’s shares just below that $5 area. This is a strong bullish indicator for stocks. When the company or its key officers look to buy back the stock, it isn’t to lose money, it is because they think the stock is undervalued at that level and that it has greater upside. Companies and corporate officer don’t invest millions or even billions of dollars to lose money.
One last example of trading strong stocks with strong catalysts is one of my favorites, Apple Inc. (AAPL). EVERYONE knows all about Apple, the catalysts in play and the continual price target increases and upgrades that are thrown around. There is huge institutional interest in Apple and equally as much retail interest. A quick search on Google or Yahoo Finance will help you to understand the fundamental catalysts in play. Ever watch Mad Money with Jim Cramer? He can help to sum it up in a few minutes, all while shouting at you and making it fun to watch and learn.
The Apple chart shows us the incredible move up once that critical $120 area was busted. Apple made nearly a straight shot to new highs at $133.60 over a few days. We traded that to the upside, and while people were calling for it to go higher, you have to realize that NOTHING in the stock market is going to move straight up or straight down forever. We needed a pull back and some consolidation before catching the curl and move back toward the highs. Nothing fundamentally has really changed with Apple. So, knowing this, we can believe this is still a good trade with plenty of upside.
Once again, we got long on Apple off the curl on the daily once the selloff and pullback appeared to be complete. We scaled in near the bottom, added at a key level over $125.50, and now have a nice low average as Apple moves up back toward its highs. Last time I traded Apple, I was out way too soon. I am not going to underestimate this mover again.
As always, for any questions about topics discussed or trade ideas, feel free to reach out to me via email [email protected]