Golden Cross Set-ups with Defined Risk
01/05/2012 11:08 am EST
New moving average crosses in these four stocks signal long entry opportunities, and though risk on such set-ups is typically high, clearly defined entry and stop levels are present here.
Many are likely aware of the term "golden cross," which is defined by a short-term moving average (MA) crossing a longer-term moving average. Most often, this refers to the 50- and 200-day moving averages.
On January 3, the 50-day MA for the SPDR Diamond Trust (DIA), the primary Dow-Tracking ETF, crossed above the 200-day MA. The 50-day had been below the 200-day since August 24, 2011.
The performance measures for buying or selling based solely on golden crosses is dismal, but I do feel that they can help identify opportunities in the markets. It should be noted that the 50-day MA on the Spyder Trust (SPY) is still 1.6% below its 200-day MA.
I have also noticed that in many cases, stocks that form new bullish crosses are ones that are also outperforming the S&P 500, meaning they show positive relative performance, or RS analysis.
These four stocks also have positive volume patterns, which allows for clear entry and stop placement.
Chart Analysis: WESCO International (NYSE: WCC) is a $2.3 billion wholesaler of industrial equipment. The stock hit a high of $64.90 in early 2011 and dropped as low as $31.06 in early October.
- The daily downtrend, line a, was broken in early November, and after a setback, it surged back above
- WCC has overcome the 61.8% Fibonacci retracement resistance from the early-2011 highs
- The moving averages are now just below $50, which represents first support
- The last swing low is at $48.46 with the late-November low at $44.77
- The on-balance volume (OBV) broke through resistance at the end of October and is leading prices higher. The weekly OBV (not shown) is also positive
Energy XXI Limited (EXXI) is a $2.5 billion oil and gas equipment and services company. It operates in Louisiana and Texas, as well as offshore in the Gulf of Mexico. EXXI traded as high as $37.20 in May 2011.
- EXXI shows very strong relative performance, as it has performed four times better than SPY since the October lows
- There is minor support now at $32 with the moving average support now at $30.13
- There is much stronger support, line d, in the $28 area
- The daily OBV made new highs on Monday (line e) and has been very strong since the October lows
- The weekly OBV (not shown) formed a bullish divergence at the October lows and is above its weighted moving average (WMA)
- It should be noted that on a seasonal basis, crude oil typically bottoms in February
Mentor Graphics (MENT) is a $1.4 billion technical and system software company. Its automation systems help to design, test, and analyze electronic hardware. The stock peaked in February 2011 at $16.56, but by August, it had lost almost 50% of its value.
- The 50- and 200-day MAs are now at $12.23
- The daily chart shows an apparent double-bottom formation (line b) that was confirmed by the move through resistance at line a
- Due to the double bottom, the $11.90 area now becomes good support, and it also corresponds to the 38.2% Fibonacci retracement support level
- Daily OBV moved through its downtrend, line c, just after the October lows, but it is slightly lagging the price action currently
- Weekly OBV (not shown) is above its rising weighted moving average
Pacer International (PACR) is a $188 million freight transportation and logistics company based in Ohio. PACR had a high in 2010 of $9.45 but traded as high as $25.25 in 2008.
- There is a high short interest in PACR with a current short ratio close to 32. That means it would take 32 days of average daily volume just to cover the short positions
- The daily downtrend (line d) was broken in the middle of December. Minor support is now in the $5 area
- The moving averages provide further support at $4.72 with the daily uptrend, line e, at $4.30
- Daily OBV has also broken its downtrend, line f, and is acting stronger than prices
What It Means: The biggest problem faced when trying to invest or trade based on crosses of the 50- and 200-day MAs is buying right on the cross. This generally requires that a wide stop be used, which then makes the risk/reward unfavorable.
Typically, I look to buy on a pullback towards the 200-day MA and often look at a level that is 0.5% to 1% above the 200-day MA. A stop under the prior swing low will often create a favorable risk/reward trading plan.
How to Profit: For WESCO International (WCC), buy at $50.28 with a stop at $48.22 (risk of approx. 4%). If filled, sell half the position at $59.44.
For Energy XXI Limited (EXXI), buy at $30.44 with a stop at $28.28 (risk of approx. 7%). If filled, sell half the position at $36.32.
For Mentor Graphics (MENT), buy at $12.42 with a stop at $11.88 (risk of approx. 4.3%). If filled, sell half the position at $14.52.
Pacer International (PACR) has the highest risk with the highest potential return. Go 50% long at $5.09 and 50% long at $4.84 with a stop at $4.38 (risk of approx. 11.8%). If filled, sell half the position at $6.45.