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 10-Month Simple Moving Average chart of SPDR S&P Aerospace & Defense ETF, which has been showing a bullish price pattern.
Today’s Chart of the Day is a Keltner Channel chart for Allstate Corp. (NYSE: ALL).
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.
Stocks in a price uptrend do not advance in a straight line.
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 Allstate Corporation stock along with the three Keltner Channels (Upper, Middle, and Lower).
The ALL daily price chart shows that the stock is in a strong price uptrend and recently became overbought ten 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 ten scenarios, ALL experienced a pullback.
And even though ALL experienced the pullbacks, the stock always continued to rally afterwards.
If you want to participate in this rally, where is 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, it signals a buying opportunity.
If you had purchased ALL shares when ALL entered the ‘Buy Zone’ around August 5th, you’d be up 8.7% on the stock by now.
But…if you had purchased the right January option contract, you would be up 56.9%!
That’s the power of options. You may have noticed that Chart of the Day doesn’t recommend specific options plays…
That’s what the PowerTrend Options service does. If you haven’t read about it yet, you can click here to check it out.
Knowing that ALL shares are continuing to rise, experience pullbacks, and rally again, we’ll be paying attention to future pullbacks in order to get in at the lowest entry point.
Editor, Chart Of The Day