What do you do when a stock that’s squeezing pulls back to the 50-day moving average? Here’s your trade on Southwest Energy (SWN) (September 15, 2016).
SWN
Today I want to look at Southwestern Energy ( NYSE:SWN ) in this video, specifically the 50-day moving average, and we will put these two together. We’ve got a sideways trading range that had that had gotten increasingly tight in Southwest Energy ( NYSE:SWN ). The 50-day moving average had been lagging and then it kind of caught up to it, and the stock started trading on both sides of it, but 90 percent of the time above it. So ultimately this 50-day moving average became support. We see the stock broke out through this volatility squeeze, that is a signal to go long if it pushed higher still, but right now all it did was match this level. But still bullish (I was bullish), and then the stock has done this, it has kind of drifted around and then finally it is down here.
Well my point for mentioning this is, because a lot of times you will see stocks do just that, drift sideways and then the initial punch through doesn’t work and the stock drifts down and then the second one does. Sometimes they don’t, it’s not a perfect formula. But what I am telling you is, just because this stock broke out or almost broke out and then didn’t, is not a reason to ditch the stock. Instead, the way you trade this thing is a couple things. First of all you look and you recognize this. You think that and you are happy because now the stock is down where it had bounced, the 50-day moving average before, it even bounced here, even back here. So it has bounced all these times at the 50. It has pulled down here and it looks like it is rebounding here too.
It is just like drawing, draw your line there. You keep your stop just a little bit below that, and you are long the stock. If it continues to zigzag here’s your deal: You are buying the stock here, you are risking a little over 2 percent. If the stock moves to test the breakout you are making almost 10 percent. So it is a 2 percent risk. A potential reward of about 10 percent, that is a good risk/reward ratio. Just keep in mind, there is a risk here. So when I am saying it can go up here. Yes, it can also go down there. And it is important to you to always factor that in. Hope for the best and have price target, but you need to PLAN for the worst. And then if the worst doesn’t happen, not a big deal. In fact it is a wonderful deal, but at least you had a plan.
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