Looking for a Bounce

07/15/2014 7:00 am EST

Focus: STOCKS

Gregory Harmon, CMT

Founder and President, Dragonfly Capital Management

Even though it’s never easy to try to pick a top or bottom, Greg Harmon of Dragonfly Capital thinks the scenario he’s recently been presented with is worth a shot with a controlled amount of money.

It is never easy to pick a top or bottom in the market or a stock. But sometimes you get presented with a scenario where the risk reward ratio is so good it is worth a shot with a controlled amount of money. MBIA (MBI) is one of those scenarios. The chart below shows a lot of information. First, the price has fallen a lot, and fast since mid June. Second, the volume on that fall was large in relative terms, but has tapered. Next, the stock price does not seem to like to spend a lot of time away from the 200-day Simple Moving Average (SMA) over the last 11 months. Fourth, it is technically oversold on the RSI. Next, that RSI is starting to turn back higher. The MACD is also leveling and the histogram is showing a reversal. Finally, on Friday, the price confirmed a reversal foretold by the Spinning Top candle Thursday, and it followed through higher on Monday.

chart
Click to Enlarge

I like this type of set up. It has a natural stop nearby at the Thursday low and if it’s mean reverts to the 200-day SMA a possible $1.50 or 15% upside is possible. 30 cents of downside risk for a possible $1.50 of upside is a great risk to reward ratio. I bought some Monday for clients and myself at 9.53.

By Greg Harmon of Dragonfly Capital

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