Even major bear markets sometimes offer attractive, low-risk swing trade setups. Here's an especially alluring short-term buy setup in shares of Loew's Corp. (L).
The reversal that has swept across much of the broad US market last week is very heartening, but it's still important to realize that this turnaround is still buried in the middle of a major bear market, one that may not end for another year or two (or three). That said, here's a peek at a very lovely short-term swing trade buy setup in Loew's shares.
Don't get this stock confused with another Standard & Poor's 500 component, that being Lowe's (LOW), the home improvement retail giant. This particular stock, Loew's, is in a completely different business, or an entire range of diverse business ventures, including the property, casualty, and life insurance business, hotel operations, cigarette production and sales, offshore oil/gas rig operations, and more. Not that any of that really affects the trade setup we'll look at—it being a short-term trade and allx—but it's still good to have some idea of the business and fundamental factors that affect any stock we may decide to buy, sell short, or walk away from.
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Figure 1 is the daily chart, along with a complete short-term blueprint for actually trading this emerging upswing:
1) Given that this is a valid bullish reversal in the S&P 500, it should have some staying power, possibly able to move consistently higher for the next four to six trading sessions. Loew's shares stand to benefit should this play out as expected.
2) Loew's shares have excellent relative strength versus the S&P 500 over the last 13 weeks, and the fresh, wide range, heavy volume upside breakout (see blue oval) also included a ParaSar (the famed J. Welles Wilder parabolic stop and reverse trading system) buy signal.
3) Long-term money flow in the stock remains very strong, rising at a steady angle of attack and well above its zero line. The Chaikin money flow (CMF)(100) was used for this measure of money flow.
4) The MetaStock Profitunity (Bill Williams) expert advisor at the bottom of the chart is also in agreement that this fine-looking bullish breakout may actually have some more room to run higher.
All in all, it's a simple and sound chart pattern; one that has all the probabilities going in its favor at the moment.
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FIGURE 2: RELATIVE STRENGTH VS. S&P 500. Of all the S&P 500 components, Loew's shares (L) rank 10th from the top in terms of 13-week relative strength versus the S&P 500.
As far as playing this anticipated upswing goes, one idea would be to enter a long position near Thursday's high of $35.49 and then place an initial stop-loss just below Wednesday's low, near $33.80. That's a $1.69 risk per share, so if you have a $20,000 trading account and want to keep the maximum account risk at 1%, you could buy about 118 shares (before commissions) of Loew's and remain within that risk control limitation. On a $10,000 account, lower that to 59 shares, or just round it off to 60 shares. You get the idea. (See Figure 2)
Now, if the stock starts to run higher, run a fairly close, two-bar trailing stop of the daily lows until your profit target is reached. And what might that profit target be, anyway? Since we expect another four to six bars of generally rising price action in the S&P 500, one idea is to consider closing out your position in Loew's after four to six trading sessions, trailing the stop all the way.
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This stock looks good for at least a $2.00-per-share gain here (given all the bullish technical and relative strength readings previously discussed), so that might also be a good place to take some—if not all—of your hard-won profits if the stock gets that high (near $37.50) within the next week or so. No sense in getting whipsawed by a corrective move lower as this current upswing reaches its mid-cycle high, is there?
By Donald W. Pendergast Jr. of ChartW59.com
