Opportunities Abound…Even in Low Volatility

You may have heard or noticed that volatility in the S&P 500 is very low, which means that a lot of stocks are moving higher in relatively tight channels. The nice thing is that the price patterns/consolidations we look for when swing trading are also quite tight/small, which creates attractive reward:risk ratios even though a stock may not initially appear to be making big moves.

The stocks below appeared on that very basic Finviz screen, and so I thought I would go through a few of them, and explain what I like and don’t like about them. Remember that there are usually a number of good opportunities that come up each week…hopefully you caught a few. I have opted to talk about the stocks below because they provide some educational insight (things to look for, and things to avoid).

Dissecting Some Stocks That Popped Up Recently

Texas Instruments (TXN) long trade: This is what I would call an “ok” opportunity. Not great, but not bad either. Here are the reasons why.

Obviously we have an uptrend over the last year, but even over that year we have periods where the price tends to range. Meaning it gets to a former high and then pulls back instead of pushing to a new high right away. That should be taken into account when figuring out the profit target. Don’t get too aggressive with it. Instead of placing the target above the recent high ($79.47), place the target near the high, or even a touch below it. The trade still has a 2.5:1 reward to risk with a target near $79.30.

The pullback in late January and early February was fairly deep in that it retraced most of the prior upwave….BUT, I like the how the price fell in late January, had a tiny bounce and then the stock fell a bit again but could barely make a new low before popping back above the high of the consolidation. That tapering off of selling momentum is what I like to see.

(Click on image to enlarge)

Hudson Pacific Properties (HPP) NO trade: No long trade due to low reward:risk.

I saw this one pop up, and it looked decent initially. I am sure some other people felt the same way, so I will bring it up. The REIT is trending higher. It can be a bit rangy at times so be conservative with the profit target. That said, a buy signal occurred on Feb. 9, but it would NOT have been taken. Once we calculate the stop loss, the profit target would need to be above $37.22 just to create a 2:1 reward:risk trade. Sure that could happen, but this REIT has more of tendency to edge above prior highs than blow past them. So this one is eliminated based on a risk/reward potential.

That doesn’t mean the stock won’t reach $37.22 or higher, but the choppier price action just means that on a risk/reward basis there are a better opportunities out there. That said, even this ‘not so good’ trade would be well in the money right now….the joys of a bull market.

(Click on image to enlarge)

Microsoft (MSFT) Long Trade: This trade is almost identical to TXN.

Recall that we don’t want to be taking trades in stocks that move in a very similar way. If you had seen the trades in TXN or MSFT, pick one, but not both. Why? Because if we risk your 1% on TXN, and then risk another 1% on MSFT, if we lose on one we will likely lose on the other, effectively doubling our risk (and yes, if we win on both, our profits would be double). There are a lot of correlated stocks out there right now…looked at HPP compared to TXN. Totally different industry, very similar charts.

I won’t rehash this trading opportunity since it is basically the same as TXN, as the chart below shows. MSFT is the red and green bars, while TXN is the purple line. They don’t move exactly alike, but it is pretty darn close. Watch for these types of strong correlations when trading.

You may be wondering which one is the better swing trade, TXN or MSFT? Recently we can see that TXN went up more and pulled back less than MSFT. That means TXN is slightly stronger than MSFT. If we run the risk/reward on both these trades, MSFT has a 2:1 reward:risk with a target at $66 (just above recent high), while TXN has a 2.5:1 reward:risk with a target below its recent high. Based on that, the choice is clear. That doesn’t mean MSFT can’t outperform TXN going forward, but based on the evidence at the time, TXN was the better trade.

(Click on image to enlarge)

There are always some trades setting up for the strategies each day. That why it is a good idea to write down potential trades as you see them. Some stock may not end up fulfilling the strategy criteria, but at least if you write a few stocks down each day, you are more likely to have a steady stream of trade ideas as some of those stocks will form valid trades.