09.18.2022
This article takes a look at two charts from this weekend's scans. Using trend, volume, relative strength, momentum, and multiple time-frames, we detail two potential trades for educational and informational purposes.
Key Takeaways
The S&P 500 is a critical level of price structure and its anchored volume-weighted average price from the Covid-low.
Until we see an upside resolution, trading short is justified.
Scanning the S&P 500 stocks for relative weakness brings to light two companies which might present short-trading opportunities over the coming days to weeks.
Baxter International, BAX, has setup nicely on the daily chart while the weekly chart shows some additional mean reversion might be in order before BAX continues lower.
Celanese Corp, CE, has broken below a trading range on the daily chart, though with a positive momentum divergence. Since the weekly chart argues for continued downside momentum, perhaps the warning clouds of divergence will dissipate without much rain.
Introduction
Starting with the daily chart of the S&P 500 below, we see price has fallen into the gray shaded zone. This zone highlights the area between a one-half to two-thirds retracement of the move from the June lows to the August highs. If the index is to successfully print a higher low here, the 3,865 area needs to hold. In addition to being important from a strictly trend perspective, price is just above the green line. This is the anchored volume-weighted average price (AVWAP) from the Covid bottom. A break below the AVWAP would mean that the average investor since the Covid-bottom is losing money. That might be potential fuel for a short-covering rally. For the time being, I argue the index is range bound at best. This gives the go-ahead for trading short.
SPX Daily. Click to enlarge.
The Charts
Scanning the S&P 500, the first idea comes from a scan looking for relatively weak stocks which are trending lower but have rallied into their declining 20-day simple moving averages. One interesting chart is of Baxter International (BAX). This company is in the healthcare sector and the medical supplies group.
Looking at a weekly chart, price stopped going up at its pre-Covid high after quickly recovering from the Covid-bottom. Since the S&P 500 topped at the start of 2022, BAX has been trading in a well-defined down trend channel. At the end of July, price broke below the prior battleground of $62.50 with force. That carried through as the downtrend intensified in its pace with price accelerating lower. Since price has broken below its lower channel bound, we could argue price is due for some mean-reversion here. Price can always surprise us and fall or rise more than we believe, so this is not necessarily a deal breaker. The first level of potential price support looks to be at the 2016 highs around $49.50.
BAX Weekly. Click to enlarge.
Turning to the daily chart, we can see that late July acceleration we saw on the weekly was a gap down on earnings which price has not come close to filling. Getting short, here near the top of the trend channel, might pay off if price continues lower over the coming days to weeks.
BAX Daily. Click to enlarge.
While this article is for educational and informational purposes only, a logical trade setup might look something like this:
Enter: Short at market price around $58.18.
Buy-stop: $60.75. +2.57.
Target: $50. -8.18.
Reward/Risk: 3.18:1.
ATR10: 1.53. Stop is 1.67x ATR10.
I would note, the August swing high, which was the first swing high after the gap down, around $62.50 would make for a better stop technically. Using that high though makes the current reward to risk unattractive. If we were to be stopped out at $60.75 and the market was still weak, getting short at that higher level around $62.50 might make more sense.
The next chart is also a daily chart of BAX. This chart shows that while price is still trending lower, momentum has flashed a positive divergence. While this does signal an improving technical condition, divergences are not in and of themselves signals that the prevailing trend has reversed. This warns us that continued mean reversion might be ahead with price moving higher or sideways next. This adds to the level of risk on this potential trade.
BAX Daily. Click to enlarge.
Our next chart also comes from scanning the S&P 500. This scan was looking for 63-day relative strength lows. The company is Celanese Corp (CE). This company is in the materials sector and the commodity chemicals group.
Looking at a weekly chart, price cut below its pre-Covid highs last June. Since then, price has continued lower. Below us, the levels of $95 and $83.50 look to offer potential support.
CE Weekly. Click to enlarge.
Turning to the daily chart, We see Friday’s candle closing below a trading range and the July low of around $105. The idea here is continued weakness which will eventually take us down to around $83.
CE Daily. Click to enlarge.
While this article is for educational and informational purposes only, a logical trade setup might look something like this:
Enter: Short at market price around $102.43.
Buy-stop: $111. +8.57.
Target: $83. -19.43.
Reward/Risk: 2.26:1.
ATR10: 4.38. Stop is 1.95x ATR10.
Below is another daily chart showing CE's momentum and key levels. The momentum condition is the reason why I might consider this trade despite its reward to risk ratio falling short of a 3 to 1 ratio.
CE Daily. Click to enlarge.
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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