Shares of industrial technology products company United Technologies Corporation (NYSE:UTX), although still higher by close to 10% for the year on Tuesday, marked their chart with a concerning technical breakdown for the near-term. While this may yet be too insignificant a move for longer and possibly intermediate-term investors to get excited over, it is worth respecting, and active investors may have a well-defined reward-to-risk trade setting up.
After having traded the markets for nearly twenty years thus far, I have learned the hard way that fighting strong and well-defined trends ultimately is not a sustainable trading strategy. The near-perfect timing necessary to get in and out of trades against the trend is both a mental and logistical hassle.
However, when a stock reaches a technical “confluence area of support or resistance” it does from time to time offer up good reward to risk opportunities to trade against those areas, as the stock gets near possibly intermediate-term overbought or oversold territory.
As such, while I see a potential “reversal” or “mean reversion” trade setting up in United Technologies at this juncture the time-frame has to be respected. This is to say that I am not calling for UTX stock to end its longer-term up-trend but rather am looking to generate some cash flow from what may end up being a near-term consolidation in the stock after having reached overbought readings.
Looking at the multiyear weekly chart, we see that UTX stock, after topping out in early 2015, proceeded to correct just about 30% into the January/February lows of 2016. From there the stock once again embarked on a strong 45% rally that recently pushed it right back to its previous all-time highs near in the low $120’s from early 2015.
As such, through a multiyear lens, the stock has done very little for long-term investors since early 2015 and in fact is now also just retesting the broken black diagonal line of previous support.
In other words, the steep rally over the past 16 months or so in my eye may have been a little too much too soon in order for the stock to be able to sustainably overcome its previous all-time highs as marked by the blue horizontal bar.
On the daily chart, we see that two weeks ago on May 24, UTX stock began to stall. This was followed by another failed rally attempt on June 2 and two follow-through selling days on June 5 and June 6. Such reversals are an important technical signal that can lead to high-probability setups, and for those unfamiliar, I’ll be hosting a special webinar June 15 for InvestorPlace readers to explain these signals and how to turn them into winning trades.
Yesterday, UTX stock clearly broke below both its eight and 21-one day (blue and yellow lines respectively) simple moving averages for the first time since early April. Barring a quick reversal back higher, the stock now looks poised for more mean-reversion lower into the mid to low $110s as a next downside target. Active investors and traders could look to play the stock lower against the $122 area as a last resort stop loss while more intermediate to longer-term investors may use this spot to lighten up on part of the position and possibly buy more again in the mid to low $110s.
Check out Anthony Mirhaydari’s Daily Market Outlook for June 7.
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