by Shane Ormond
On Jan 21, 2020
Now that the Chinese factory is complete (and just in time for a deadly virus outbreak), self-proclaimed “Buff Mage” Elon Musk is turning his attention to Germany, where colonies of bats and unexploded World War II bombs threaten to undermine investor confidence. (Those are not metaphors.)
Yesterday, we looked at a chart of Mid-America Apartment Communities Inc., which has been showing a bullish price pattern.
Today’s Chart of the Day is a Keltner Channel chart for Restoration Hardware (NYSE: RH).
RH operates as a retailer in home furnishings. It offers products in various categories, including furniture, lighting, textiles, bathware, décor, outdoor and garden, and tableware furnishings. The company provides its products through its retail galleries, a series of catalogs, as well as online through several websites.
Now, the Keltner Channels serve as an overbought/oversold indicator. When the daily stock price is trading above the upper Channel, it signals that the stock is overbought.
We’re only interested in a stock when it’s temporarily oversold, meaning it’s on a pullback from being overbought.
Since we know that stocks in a price uptrend do not advance in a straight line…
And that there are always price retracements along the way…
When a stock becomes overbought, it normally declines in price as the inevitable profit taking occurs.
Below is a daily price chart for Restoration Hardware stock along with the three Keltner Channels (Upper, Middle, and Lower).
The RH daily price chart shows that RH is in a strong price uptrend. It recently became overbought seven times as the stock traded above the Upper Keltner Channel (circled in red).
As you can see, after trading above the upper Channel in all seven scenarios, RH experienced a pullback.
Yet even though RH experienced the pullbacks, in all cases the stock continued to rally afterwards.
If you want to participate in this rally, how would you choose the best place to enter?
We use the Keltner Channels to help us select a lower-risk entry point.
A Keltner Channel ‘buy zone’ occurs when a stock
is trading below the upper Keltner Channel. Once the daily price is trading below the Upper Channel, a buy opportunity is signaled.
For example, if you had purchased RH shares when RH entered the ‘buy zone’ around July 31st, you’d be up 30% on the stock by now…
If you had purchased the RH January 17, 2020, $115 strike call option? You’d be up 111.46% by now.
Knowing that RH shares are continuing to rise, to experience pullbacks, and to rally again, we’ll be paying attention to future pullbacks in order to get in at the lowest entry point.