10.15.2022
Having retraced more than 75% of its uptrend, can price continue all the way down to its IPO price?
THE CONTEXT
Today’s idea is courtesy of a complex scan. It basically searched for members of the S&P Mid-Cap 400 which have rallied into downward sloping 20-day moving averages and have downtrending relative strength lines. One very weak chart stood out, and it belongs to the company Concentrix Corporation (CNXC).
The chart below shows the S&P 500 ETF (SPY) in the top panel and the S&P 400 ETF (MDY) in the bottom panel. SPY has its blue yearly trend line and orange quarterly trend line both sloping downwards. MDY has its blue yearly trend line sloping downwards, though its orange quarterly trend line has yet to turn downwards again.
S&P 500 ETF (SPY) and S&P 400 ETF (MDY) Daily. Click to enlarge.
The next chart shows CNXC's industry group, which is software (DJUSSW), in the top panel. DJUSSW printed a new low last week, revealing the industry group's weakness. The bottom panel compares CNXC with DJUSSW. It does look like CNXC is just as weak as DJUSSW, though not the weakest.
Dow Jones US Software Index (DJUSSW) &
Concentrix Corp (CNXC) / Dow Jones US Software (DJUSSW). Daily. Click to enlarge.
THE IDEA
The chart below is a weekly chart, revealing CNXC's entire price history. CNXC separated from the Synnex Corporation (SNX) in December 2020. The chart frames CNXC's price from its 2020 IPO low (A) to its 2022 high (B) with orange horizontal lines. In between those price extremes, also marked with orange horizontal lines, is the one-third (33.34%) and the two-thirds (66.67%) retracement levels. Having broken down more than two-thirds of its primary advance and not showing any change in behavior, this could mean price is prepared to make the roundtrip from its IPO price (A) to its 2022 high (B) and back down to its IPO price (A).
Also on the chart, the two bottom panels show CNXC relative to MDY, an index of its peers, and DJUSSW, its industry group. The red highlights mark 52-week relative lows and the orange moving average represent 13 weeks, one quarter. This chart shows CNXC is a weak stock compared to its index and industry group. Hopefully, the recent improvement in relative strength is not a problem as much as a mean-reverting phenomenon ahead of its next leg lower.
CNXC Weekly w/ retracements & relative strength . Click to enlarge.
THE TRADE DETAILS
Enter with a market order for Monday's open: $117.69.
Protect with a sell-stop: $130.55. +12.86. 2.7x ATR10.
Target: $80. -37.69
Reward/Risk: 2.9:1.
ATR10: 4.75.
Estimated hold time: 3-6 months or until price says otherwise.
CNXC Daily w/volume & momentum. Click to enlarge.
WHAT'S NEXT?
The idea is to capture trend continuation to the downside. We need to print a lower-low over the next few weeks without printing a higher-high. This will keep our thesis of lower prices intact to finish out this year. With MDY in a downtrend and CNXC being a weak stock, in a weak sector, in a weak industry, the major risk here is market risk. In other words, the risk here of an oversold rally in the major averages due to the winds of seasonality now at our backs in addition to the numerous breadth, sentiment, and technical indicators in an oversold condition. The comfort is in knowing that markets can stay overbought for long periods of time.
As always, thank you for reading. This article is for educational and informational purposes only. Trade at your own risk. The author may or may not have a position in the securities mentioned. Read our full disclaimer here. Please reach out with any feedback or comments. I would love to know if you agree, disagree, or don't care at all. Louis@eastcoastcharts.com
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