Earlier in the year, I had asked you to post things that you would be interested in me analyzing, and to my amazement, many of you asked for stocks. While that is outside my normal scope of the markets, I believe that my technical analysis could prove beneficial. So, with that in mind, I will start to share some technical analysis of U.S. stocks.
To keep it interesting, I plan on cycling through the stock market in alphabetical order using the criteria below.
Of course, I will continue to analyze the precious metals market, and that will still be my primary focus.
1. U.S. companies
2. Market cap $2 bln - $10 bln
3. Average volume - over 500K
4. Relative volume – over 1
5. Stocks only
6. No REIT, no biotechnology
In the table below there is a list of stocks filtered according to the criteria mentioned above.
Table 1. Selected stocks for letter A
Adding tickers one by one into the chart I found a stock, which has an interesting technical setup. Below is the chart of it with the annotations added.
Chart 2. American Equity Investment Life Holding Company (NYSE:AEL) Weekly: Short Setup
The price of AEL moves within a large range set by the 2015 high at $30.02 (labeled as red A) and the 2016 bottom at the $12.65 (labeled as red B). The move from point B to point C almost fully retraced the AB segment’s move but failed to progress beyond the $28 mark, which was hit this February. From that peak it lost more than 20% by the middle of April as the Bears started to dump the stock. Then the chart shaped the countertrend upside move till the end of May with the top at $25.80 hitting the common 61.8% Fibonacci retracement level, which blocked further price growth. This move was isolated with blue trendlines and labeled as a Bear Flag chart pattern. But this time it’s not the main figure on the chart.
There is a possible Complex correction for AEL’s stock price, which consists of two red segments. The second red CD segment could have been started this February from the $28 mark. If we assume that the CD=AB segment, then the target for it is located at the $10.63 level. It means that the price could lose more than a half of its current level. Looks interesting right? But to be conservative, I would watch the previous major low labeled as the B at the $12.65 mark for reaction first. It could be a good level to book a profit of the short position.
Let’s get back to the Bear Flag pattern. It shows us that the price closed the week on the edge of the downside of the flag. The break below it would aim at the $18.40 target (blue dashed line, 24% gain). This would be enough to break the orange support line, which offers the final confirmation of the downside move once broken.
I’ve witnessed this type of correction before and I call it an “LULU-type” move and from the last chart below you would understand why I gave it this name after we look into AEL’s fundamentals at the next table to finish the analysis.
Table 3. AEL fundamentals
As we can see from the table above, there is not much short float in this stock (just 2.24%), although insiders are selling it, which could support my assumption for a short position. The debt-to-equity is not so big and it’s stable and the price ratios are not overvalued. Forward P/E is lower than P/E for good. The dividend yield is not so attractive. ROA, ROE, ROI are positive. Overall, there is nothing extremely negative that could lead to the huge price drop. So the fundamentals in general don’t support the technical setup.
Below is the promised sample of the anticipated complex correction.
Chart 4. Lululemon Athletica Inc. (NASDAQ:LULU) Weekly: Historical Sample
This well-known company has even better performance indicators compared to AEL but despite that it had lost more than a half price in the AB segment and is going to lose one more time in the current CD segment. The $36 area could be hit. And this type of correction could be repeated in AEL’s stock price. The AEL chart already has a similar AB segment structure with the LULU chart – the same first short move down, then countertrend correction and then long move down. However, CD segments have different proportion.
I think the reason why technical setup and fundamentals contradict is the phenomena of correction. The big move preceding this complex correction was to the upside and it was based on the sound fundamentals. And now the market is not falling, but consolidating the power for possible upside continuation and it could be seen only on the larger time frames – maybe a yearly chart would fit the best. So it could be just a break for profit taking and on the shorter time frame we could gain on it.
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INO.com Contributor, Metals
Disclosure: This contributor has no positions in any stocks mentioned in this article. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.