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 Walmart Inc., which has been showing a bullish price pattern.
Today’s Chart of the Day is a Keltner Channel chart for iShares U.S. Home Construction ETF (NYSE: ITB).
ITB tracks the investment results of the Dow Jones U.S. Select Home Construction Index, which is composed of U.S. equities in the home construction sector.
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 ITB stock along with the three Keltner Channels (Upper, Middle, and Lower).
The ITB daily price chart shows that ITB is in a strong price uptrend and recently became overbought six times as the stock traded above the Upper Keltner Channel (circled in blue). As you can see, after trading above the Upper Channel in all six scenarios, ITB experienced a pullback.
Even though ITB 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?
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 ITB shares when ITB entered the “Buy Zone” around March 29th, you’d be up 24.5% on the stock.
But if you had bought the January 17, 2020 $30-strike call option, you would be up 106.7% by now! That’s after only one trade!
Knowing that ITB shares are continuing to rise, experience pullbacks, and rally again, we’ll be paying attention to future pullbacks in order to get in at a favorable entry point.
Additionally, we’d like to talk about how a previous Chart of the Day stock has done…
On November 6, we highlighted The Western Union Co, (NYSE: WU), noting that it was on a bull run.
If you happened to have purchased WU shares on that day, you’d already be up 5.2%.
But… if you had purchased an option contract, you would be up 68.6% in just two days!”
That’s the power of options.
Editor, Chart Of The Day