As we rise this morning, the turmoil in Greece continues to plague global markets (a little more about that here). As such, because we need to consider the immediate-term uncertainty around the markets, let’s instead focus on a trade idea that looks promising through a longer-term lens.
Shares of supplemental insurance company AFLAC Incorporated (NYSE:AFL) are just barely in the black this year (much like the broader market). However, the underlying trend both in absolute and relative terms looks enticing, as Aflac stock stands to move meaningfully higher while also should massively outperform the broader market in the coming 12 months or so.
My base case for the next couple of years remains that the financial sector as a whole will outperform many other sectors. The significant underperformance coming out of the financial crisis calls for a mean-reversion move of meaningful proportions.
Aflac Stock Charts
Let’s start off with the relative picture of Aflac stock versus the financial sector, as represented by the Financial SPDR (NYSEARCA:XLF).
The multiyear ratio chart shows that AFL has been underperforming the financial sector for a few years now, and in 2014 the ratio fell below a horizontal support line. The relative strength in Aflac stock versus the sector since late 2014, however, now shows a more favorable picture.
A break back above the black horizontal would likely call a bottom for the relative weakness in AFL and usher in a new trend of outperformance.
From a multiyear weekly view, Aflac stock prices have rallied hard off the 2009 lows, and now AFL offers both defined support and resistance — qualities that active investors should always appreciate.
The most recent higher lows took place in October 2014 and January 2015, which are keeping the stock coiled up and giddy for an eventual push past the horizontal area of resistance around the $67-$68 area. A break and hold above there could coincide with a break above the horizontal line of resistance on the above ratio chart, which would be nothing but bullish.
Finally, zooming in closer on the daily chart, we see that Aflac shares have been consolidating nicely above their 200-day simple moving average (red line) in recent months, which came after putting in a meaningful reaction low last October and a higher low this February.
Furthermore, the price action since the April top has AFL trading in a bullish flag pattern.
In the immediate term, Aflac stock may well be overbought, so active investors are better off buying shares on dips as low as $60.
Eventually (read: in six to 12 months), AFL looks to move toward the $75-$80 area.
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Successful trading and investing starts with a plan. Download Serge’s essential trading plan, TheEssence of Swing Trading e-book. As of this writing, he did not hold a position in any of the aforementioned securities.
