Selecting a Trade —2 Support and Resistance S/R
In this example I will use daily, weekly and monthly charts. In charting, S/R is the most important aspect of determining where to buy or sell a stock. In this case CMG has had a recurring set of bad news based around e. coli bacteria in their food, not good news for a restaurant.
With trailing earnings of 16.76 and estimated FY 16 forward earnings of 16.39 CMG is very overpriced and has been for quite some time. Growth has slowed to 1 or 2 percent so the P/E should be between 8 and 15. At 15 P/E CMG is worth 251.40.
With trailing earnings of 16.76 and estimated FY 16 forward earnings of 16.39 CMG is very overpriced and has been for quite some time. Growth has slowed to 1 or 2 percent so the P/E should be between 8 and 15. At 15 P/E CMG is worth 251.40. With their recurring E. coli problems that growth could become negative.
The daily chart you see above (April of 2014) shows the detail of the bottom at that time. This is support for the current move down (December of 2015). Occasionally I have had to look back 10 or 12 years for S/R levels. They are still effective many years later.
This drop from 580. To 472.41 was caused by a 22 cent miss on their earnings call on April 17, 2014. The reason is irrelevant though. The only thing important thing here is that CMG found willing buyers at this level and will more than likely find more here again. CMG has fallen from 758.00 to 482.00 and will be perceived as a buy by many uneducated buyers.
This will be a bounce play only but it COULD bounce as high as 597.00 which makes it a viable trade candidate.
The low on the chart is 472.41. I always use yellow lines for the tail of a candlestick. The close on that red candle was 476.28 and those are your support levels. If I traded this my stop order would be 471.50 or so.
When you have a fall this drastic in a stock that has been an investor favorite for so long a period of time a strong support level will usually generate a nice bounce in the stock in spite of the fundamentals. Bear in mind that CMG has been trading at a high P/E for years.
One last thing on the chart above. In the circled area we have a pattern called a cup and handle. This is a reliable reversal pattern. The cup in this case is the V bottom. The red line near the top of the circle is the breakout level of the handle and the first top of the first bounce from the bottom. The stock then consolidates for 13 days before breaking out. The buy here is just above the breakout. The stock continued up for a month from there and gained more than 80 points.
Now we have the weekly chart and the support levels are much easier to see. On the left side of the chart note that the support levels are at 499.00, with the tail of the candlestick at 472.41. 494.30 is the opening price My problem here is the 27 point spread in those numbers.
When a favored stock has fallen this far there will often be a lot of buyers at a strong support level. As they sit and watch this fall they start to become anxious about whether they will be filled where they want to get in. Then there are the cowboys who just buy because it has fallen so far. Don’t forget that there were buyers all the way down from 758.00. Every penny CMG fell someone new perceived it as a great buy. Folks will often start getting in early and you have to determine if the stock is going to turn early or reach the target. The determining factor for me is my stop price. No matter where I buy at my stop price is still 471.50.
You have to have the knowledge to determine the support levels and the discipline to wait for it to get there.
Finally we have the monthly chart. Here we find that there is no doubt where support is.
I’m writing this on Saturday so Monday could be pretty exciting. CMG bottomed at 482 and closed at 495 this week. Was that the bottom? Who Knows?
Don’t forget this was an exercise in finding support and resistance. I left out very important info on the fundamentals. Do your due diligence before you jump into CMG.