Oil is up after Hamas attacks in Israel … market weakness is presenting lots of trading opportunities … analyzing Coke from a trading perspective … a huge event with Louis Navellier this Thursday
In the wake of the Hamas attacks on Israel over the weekend, stocks were under pressure throughout much of today’s session, though they rallied to close the day.
Here’s CNBC with a quick recap of what happened over the weekend:
The Israeli-Palestinian conflict escalated Saturday after militant group Hamas staged an invasion, to which Israel was seemingly caught off guard.
More than 700 Israelis have been killed in what Hamas is calling Operation Al Aqsa Flood, with at least 490 Palestinians killed in retaliatory Israeli strikes on the Gaza Strip.
The attack led Israeli Prime Minister Benjamin Netanyahu to declare his country is at war.
First and foremost, our thoughts and prayers go out to the innocent people caught in the middle of this violence.
As to the global investment markets, with stocks shaking off their earlier losses, the greatest impact is in oil. The price of West Texas Intermediate Crude jumped 4.3% to $86.33.
Though stocks could come under further pressure based on whether violence in the Mideast ratchets up, investors are typically quick to refocus their attention on the variables that more closely impact prices. So, for now, stocks are trading higher despite the tragic news. We’ll keep you updated.
Meanwhile, the market selloff since August is suddenly presenting loads of potential trading opportunities
One that has caught our eye is the carnage with blue-chip beverage giant, Coca Cola.
As you can see below, since early May, Coke has dropped 17%. This is a big move for this usually stodgy market blueblood.
Is this setting up the chance to grab some quick trading gains as Coke bounces back from this rapid decline?
Stepping back, in recent Digests, we’ve urged readers to hone their trading chops
This recommendation is due to the turbulent market environment that we believe we’re entering.
As the 10-year Treasury yield appears to have just changed its cardinal direction for the first time in 40 years, the bullish buy-and-hold conditions we’ve enjoyed for decades are less certain going forward.
We anticipate an escalation of choppy market conditions. And while that’s tough for buy-and-hold gains, it can be great for active trading.
So, how does Coke look today through a trading lens?
Let’s begin big picture with an assessment of Coke’s moving averages (MAs)
To make sure we’re all on the same page, a moving average is a line on a chart showing the average of some prior number of days’ worth of asset prices. Three of the most frequently referenced number of days are 50, 100, and 200. Traders view these time-periods as short-, medium, and long-term.
Below, we look at Coke’s price chart over the last year with all three of these MAs.
Now, usually beginning your trading analysis with your MAs is helpful because it gives you broad perspective on where a stock price is relative to recent momentum. But as you’re about to see, these MAs aren’t especially helpful for today’s Coke analysis because they all say the same thing…
Coke’s stock price has imploded.
As you can see, Coke is no longer anywhere in the ballpark of its major MAs.
What the RSI and MACD are telling us
Based on the price chart above, it appears Coke is the victim of an abnormally vicious selloff. But let’s get some additional perspective to help us contextualize and confirm such a conclusion.
While there are many great technical indicators available, we like the Relative Strength Index (RSI) and the MACD Indicator.
The RSI is a momentum indicator that measures the extent to which an asset is overbought or oversold. A reading over 70 suggests an asset is “overbought” (and likely poised to pull back as buying pressure wanes) while a reading below 30 means it’s “oversold” (and poised to climb as bargain-hunters step in to buy).
The MACD stands for “moving average convergence/divergence.” It reflects changes in a price trend’s strength, direction, momentum, and duration. Traders use this tool by analyzing the location of the MACD line relative to its signal line.
At its most basic interpretation, if the MACD crosses above the signal line, it’s considered a bullish crossover, and potentially a buy signal. The opposite is true as well.
Consideration is also given to whether the MACD and signal line are trading above or below the zero line.
For example, if the MACD is deeply below the zero line, this suggests extreme oversold conditions. So, if you see a bullish crossover from this depressed level, an explosive mean-reversion rally could be in the cards.
So, what can we learn about the attractiveness of a Coke trade today based on these two indicators?
Well, here they are on a six-month timeline. Take a look to arrive at your own conclusion first.
A quick analysis provides us two big takeaways:
- The recent selloff in Coke is highly abnormal. The strength of this selling pressure has resulted in the deepest oversold levels in both the RSI and MACD that we’ve seen in six months.
- Despite these oversold levels, neither indicator is showing sustained signs of a bullish reversal.
So, is it time for a bullish trade on Coca Cola or not?
Well, you’ve likely heard the trading phrase “don’t try to catch a falling knife.”
Coke’s current price action is the poster child for “falling knife.”
So, no – though Coke’s selloff puts it high on our list of potential trades, it’s not a green light yet. After all, “down 17%” could easily become “down 27%” in no time.
The green flags we’re waiting to see
What we’re waiting for now is greater evidence that bearish price action is changing direction. But most importantly, we want confidence that it’s changing direction in a sustained way – not a head-fake.
While you’re never going to have ironclad proof that you’re not falling for a head-fake, there are a handful of things we’d be looking for.
On our RSI chart, we’d want to see the level push out of overbought territory, climbing above 30 with a strong, steep slope (not a sideways, meandering slope).
On our MACD, we’d want to see the MACD line push north through its signal line. And based on the severity of this selloff, we’d probably wait until it appeared highly likely we would be crossing above the zero line soon.
On the price chart itself, we’d be looking for a clear pattern of “higher highs” and “higher lows.”
As an example, here’s Coke’s stock from mid-February through late-March. Though it’s bouncing around, the stock is clearly setting higher peak-points and higher trough-points.
Now, here’s a back-and-forth I’ve had with friends when we’ve discussed this issue.
- “But how long will it take to see this “higher high” progression?
- “There’s no set time. A week? Maybe two. Could be three.”
- “But wouldn’t you miss lots of the gains by the time you felt convinced of a genuine direction change?”
- “You could. But what’s more important to you – trying to make the most money from a trade, or trying to prevent being tricked into a bearish money-losing trade?
Will you lean toward being conservative or aggressive?
There’s no “right” way to trade. There’s only the right way for you.
If you’re more aggressive and focused on capturing larger gains, you might feel more comfortable jumping into a Coke trade on the earlier side. You wouldn’t need as much confirmation of a new, bullish trend change.
In the “pros” column of this approach are the potential for bigger gains. In the “cons” column, there’s the increased chance you buy into a bullish head-fake and lose money as Coke drifts lower.
If you’re more conservative, you would likely choose to wait until your indicators are more convincing in their bullish readings. While this will do a better job of preventing you from buying a bullish head-fake, you will give up some early gains that could be significant if the trade takes off like a rocket.
This is your tradeoff to make.
To begin helping you get your feet wet with trading, here are some additional set-ups that look interesting today
None of these are official trade recommendations. But you can use them as “paper trades” to begin honing your trading chops.
Check out the utility sector. It has been destroyed as bond yields have surged.
Below is a chart of XLU, the SPDR Utilities Select Sector ETF. Notice how its RSI and MACD readings are deeply oversold. But this time, unlike Coke, both appear to be turning bullish
The RSI is nearing 30, and the MACD looks like it’s trying to flatten out.
Meanwhile, on the price chart, we’re seeing the first efforts toward this “higher high/higher low” progression.
For another option, check out Dollar General.
Finally, here’s Realty Income.
As you can see, Realty’s RSI has now climbed above 30. Meanwhile, it’s MACD appears to have just completed a bullish crossover.
However, on the price chart, all we have is one “higher high” – not a sequence of them that suggests greater confidence about a true trend change.
How would you trade each of these set-ups?
We’ll continue bringing you more hypotheticals in the weeks to come
In the meantime, if you’d prefer to outsource the trade selection process to one of our InvestorPlace experts, put this Thursday on your calendar.
We’ll bring you more details this week, but Louis Navellier is debuting a brand-new trading service. It combines the heart of his multi-decade market approach – fundamentally superior stocks – with AI-based short-term trading signals.
Here’s Louis:
In today’s market, I know that many of my readers want cash now.
In other words, in a world where even the best growth stocks can go sideways for months at a time… and the cost of living is becoming outrageous… a lot of folks want to do some trading and book solid gains every week.
So, that’s exactly what we’ll be doing.
We’ll make short-term trades and trade every week and then watch these gains accumulate – through bull or bear markets.
Louis will be detailing the specifics of this new trading product this Thursday at 7 PM Eastern. We’ll bring you more information this week, but to go ahead and reserve your seat right now, just click here.
Stepping back, two months of selling pressure is now creating all sorts of potential trading opportunities. We think this is just the beginning of a far longer period of turbulent market conditions that will benefit successful traders. It’s time to start honing your skills.
Have a good evening,
Jeff Remsburg
