The broad stock market reversal lower on Tuesday left behind plenty of bearish reversals in stocks across most sectors of the S&P 500. Industrial stocks, which have shown relative weakness for a good part of the year (off and on) through the lens of technical analysis failed right where they “should have” earlier this week and among them Stanley Black & Decker (NYSE:SWK) now looks to set up for a bearish play that active investors and traders could sink their teeth into.
This is a good spot to remind ye faithful that stocks as an asset class are highly correlated, and the correlation is even higher within sectors. As such, when the industrial sector gave a notable bearish reversal on Dec. 4, it was nearly impossible for many stocks in the sector to have a bullish day. This positive correlation within stock groups provides active investors with a constant stream of high probability opportunities in what is called the sector and group rotation game.
SWK Stock Charts
Moving averages legend: red – 200 week, blue – 100 week, yellow – 50 week
Moving on to shares of Stanley Black & Decker, on the longer-term weekly chart we see that the stock peaked in January of 2018 and then through October fell about 40%. Along the way SWK stock sliced through its 50- and 100-week simple moving averages and for a couple of weeks even pierced below the red 200-week moving average.
The 40% drop, however, also led the stock to mean-revert back to its multiyear green support line, which is where the stock bounced from in October. While for the moment I think this green support line, which currently comes in around the $110 area, could hold as support, on the next chart we see that a revisit of this level on the downside may be in the cards.
Moving averages legend: red – 200 day, blue – 100 day, yellow – 50 day
On the daily chart note that SWK stock bounced in October and rallied sharply following its earnings report. The rally however came to an abrupt stop earlier this week, right at a confluence resistance level for the stock. This technical resistance level around the $135-$140 area is made up of both horizontal resistance as well as the blue 100-day moving average. Also note that all three intermediate-term moving averages are pointing lower.
Active investors and traders here could leg into bearish positions, making the bet that the stock will resume its decline with a first downside profit target at $115, followed by possibly $110. Any strong bullish reversal would be a stop loss signal.
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