Yesterday, we looked at a Daily Price Chart for Fidelity National Financial, Inc. and noted that the stock has been on a 10-Month SMA ‘buy’ signal since March.
Today’s Chart of the Day is a daily price chart with Keltner Channels for Taiwan Semiconductor MFG (NYSE: TSM).
TSM, and its subsidiaries, engages in manufacturing, selling, packaging, testing, and computer-aided design of integrated circuits and other semiconductor devices. It also makes masks, electronic spare parts, and color filters.
And if we look at the stock contained within the Keltner Channels, we notice something very important.
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.
When a stock becomes overbought, it normally declines in price as the inevitable profit taking occurs.
Stocks in a price uptrend do not advance in a straight line. There are always price retracements along the way.
That’s what we’re watching for.
Below is a daily price chart for TSM stock, along with the three Keltner Channels (Upper, Middle, and Lower).
The TSM daily price chart shows that TSM is in a strong price uptrend, and 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…
TSM experienced a pullback.
Even though TSM experienced the pullbacks, the stock always continued to rally afterwards.
If you want to participate in this rally, how should you decide when to get in?
You’d use the Keltner Channels to 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 TSM shares when TSM entered the “buy zone” around August 5th, you’d be up 32.1% on the stock — a strong return for a hold as short as three months.
Knowing that TSM shares are continuing to rise, experience pullbacks, and rally again, we’ll be watching closely for future pullbacks in order to get in at a favorable entry point.
Editor, Chart Of The Day