Technical Analysis: Charts With Solid Risk/Reward ~ market folly

Wednesday, September 10, 2008

Technical Analysis: Charts With Solid Risk/Reward

Just wanted to breeze through some charts really quick, since it's been a while. Time for some good old technical analysis. Ok, right to it. BJ's Restaurants. Simply put, this place is a clusterf*ck. They're facing rising input costs and slower dining traffic. As I've written about here and here, the consumer environment just isn't that hot right now. In fact, its accelerating to the downside. So, this place will only get squeezed harder. Their solution? Raise prices faster. Oh, great, that will really get struggling consumers in the door. BJRI is hurting so much for any type of positive news that it was up 9% yesterday on an analyst upgrade. Yes, one upgrade. Well, the good news is that this fluke of a 9% move gives us a low risk opportunity here. Check out the chart below.

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As you can see, BJRI used to bounce right off of support at $13.5 way back in April and May. Then, the stock ripped lower. It has already tried to test $13.5 once in August and it failed. Well, it's right back up at those levels again. $13.5 was past support and thus is now future resistance. The analyst upgrade today moved the stock up to a high of $13.62. So, a low risk play here would be to short BJRI at these levels and then place your stop just above the resistance (and the 200 day moving average) at around $14 or so. You can be the judge as to how tight of a stop you want to use here. One thing to note if you want to play this from the short-side: be cautious because the recent move upwards has had some volume behind it. Because, as you've seen yesterday, the slightest bit of positive news can send these consumer related names flying. Conversely, if you do get stopped out, you could just flip your trade to the long side. Because, if BJRI breaks out above its 200 day moving average, as well as above the strong resistance at $13.50, it has the potential to go much higher. Another option would be to just stand on the sidelines to see which way it is going to move and then pile on. The point here is that BJRI has very clear risk/reward in both directions. Watch it and play it however you're comfortable.

Next up, I want to point out the large channel Goldman Sachs (GS) has been trading in for a long while. I meant to post this up a few weeks ago, but I've been so busy that I forgot. Here's the original chart I meant to post up showing the clear support for GS at around $155 and then the resistance at around $200 (you could also make a point for resistance around $190).
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Now, take a look at GS currently.
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As expected, it bounced right off $155 and traded higher up to $170. The simple play here has been buy GS around $155 and stop out around $145 or so (depending on how tight you want your stop). Then, you turn around and sell GS as it rallies higher into various levels of resistance around $170, $190 or wherever you want to lock in some profits. As you can see, this name has been trading sideways for a while. So, while there might not be a big play here right this moment, keep your eye on it. Eventually, some very favorable risk/reward setups will take place just as they have in the past in this name.

Next, I want to turn to a little series that I like to call: There's no such thing as a triple bottom. First up, we have Companhia de Saneamento (SBS). Now, I actually like this name as a longer term play on Brazil. But, for the time being, you absolutely have to respect the technicals, which point to lower prices. Obviously this presents us with a risk/reward setup. You can either try to catch a falling knife (which I don't really recommend). Or, you can wait until it slices through that past support line and short it down along with the rest of the momentum players. It's up to you. The point is that around $37 or so has served as past support for SBS as it double bottomed back in April of 07 and February of this year. You could get a reflex bounce off that support level. But, since we all know there is no such thing as a triple bottom, it looks like it's heading lower.
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The second chart in the "no such thing as a triple bottom" series is Freeport McMoran (FCX). Again, this company is actually a great name to own for the longer term, as valuations have just gotten ridiculously cheap. But, in the mean time, you've got to respect the technicals. Some hedge funds have been forced to sell their shares, while others are merely front-running each other. It's a mess out there and it doesn't look like it will end anytime soon. On the chart, you see that FCX double-bottomed in September of last year and February of this year. Yet again, we're down along those levels of $65. Triple bottoms don't exist so I expect this name to trade even lower to the secondary support level I've drawn in around $60. This is simply another risk/reward setup for you to keep your eye on. These charts are painting an ominous picture right now.
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So, what does everyone think about these setups? Are there some you like, some you don't? Would love to see what other people think about these setups. Because, after all, technical analysis is in the eye of the beholder. And, what I see could be completely different than what you see.

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