Tools For Spotting A Bottom In A Declining Stock – CNR Stock – June 16 2015

Tools For Spotting A Bottom In A Declining Stock – CNR Stock – June 16 2015

As members are aware, I have been trading in CNR Stock using the Milking The Cows Strategy this year. You can review the Milking The Cows Strategy here. I explained a few months ago that I was expecting CNR Stock to work it way down to the $72 level before trying to bottom from the recent downturn. The downturn in the transportation sector started in late February and has been steady since then.

Closing June $80 Puts

Back on March 23 I bought 4 put contracts of the June 19 expiry at the $80 put strike for $2.03. Today as we enter the expiry week for these puts I sold my puts for $6.70. I will not be buying additional put contracts but I did sell more put contracts for July 17 expiry at the $72 put strike yesterday earning $1.27 per contract. The reason I will not be buying more puts is because I believe CNR Stock has found the bottom I had been writing about. Because of that I am back selling puts at the $72 put strike using the Milking The Cows Strategy.

Selling The $72 Put Strike

I am not saying there won’t be further declines in the stock but I think the big move lower is over for the transportation sector stocks or certainly for the likes of CNR and CP Rail Stocks over the summer period.

To spot a technical bottom in a stock (not an index) I use primarily 4 indicators. These are accumulation distribution, momentum, MACD and the Ultimate Oscillator. The slow and fast stochastic tools are not as dependable as they are looking back in time only for a short period and their tools take into account the decline in the stock to predict the next movement. Naturally then after a strong decline and a lengthy one, those two tools should be pointing to a recovery, but as the Fast Stochastic is looking out just one day and the Slow Stochastic a few days at most, any prediction on a bottom in a sell-off is tough to have confidence in, since their time frames is too short.

Looking at the 6 month daily chart below you can see that the $72 valuation I had been writing about and trading against was reached in mid-May. Note how since then the stock has been trending sideways as investors sought support through seeing if there was enough buying interest. If buyers were not interested in the stock at this level, it would continue to fall until buyers finally showed up.

Accumulation-Distribution Indicator

The accumulation distribution tool is key to watching for a bottom. Note how the sell-off in the stock brought in sellers and the accumulation of the stock ended by late March. Sellers then took control and the level of selling picked up until by mid-May the amount of selling was strong but had started to level off. This leveling off is key to understanding when a stock is probably bottoming. As sellers kept dumping their shares from Mid-May until even today (June 16 2015) note how the amount of selling is NOT FALLING. In other words, the negative readings are not increasing. This is a signal that buyers have finally shown up and they are picking up some stock each time sellers dump theirs.

When a sell-off happens, investors should not panic but check the accumulation distribution indicator for signs that a bottom may be reached. This tool can often save investors from losing capital or giving up their shares when a bottom is actually nearing. Far too often when a stock falls, investors hold their shares until they cannot stand the decline any longer. They finally sell their shares only to find that the stock recovers a few weeks or months later. Using the accumulation distribution tool can assist in keeping an investor calm, especially as a decline deepens.

Momentum

Momentum is important as a short-term and longer-term indicator. That is why I use it often. You can see that as the decline deepened in CNR Stock momentum starting to rise from being extremely weak to staying negative but definitely less weak. Momentum at this stage in the decline is advising that the selling pressure it weak and although it is still negative, sellers have, at least for the moment, tired of dumping their shares.

MACD

Moving Average Convergence / Divergence is important as it spots buy and sell signals. It can be used for long-term and short-term trading. On May 28 it issued a buy signal which continues to gain strength despite the stock’s decline. Note too how the histogram, which is the grew chart behind the signal lines, has been positive almost since May 28. Both are signs that the stock appears to have bottomed, even short-term.

Ultimate Oscillator

The last indicator I use is the Ultimate Oscillator. This tool is significant as while it predicts based on the past movement in the stock it also predicts based on the underlying strength of both buyers and sellers. You can see for example how recently the signal turned very negative on June 8 and was extremely oversold. In other words, it was advising investors that selling was reaching a probably climax. Within a day of the deeply oversold signal the Ultimate Oscillator was moving back higher. The Ultimate Oscillator turned positive on June 11 and continues to stay positive. This is another signal that advises the stock may have bottomed.

Technical Tools To Spot A Sell-Off Bottom - June 6 2015

Technical Tools To Spot A Sell-Off Bottom – June 6 2015

 

It is important to understand that nothing is infallible. This is part of the reason why I use more than one or two indicators when reviewing a stock. It is also important to understand that even with a bottom signal in place, there will be tests of those signals and some times there will be a break to the downside. However it is surprising how often a break to the downside is followed by a rally, after a bottom looks like it has been put in place. This is only natural because most investors do not follow technical indicators but simply buy and sell based on their “instincts”. Often those instincts are wrong but if enough sellers pressure a stock, it will fall simply because the buyers move aside to see just how far a stock may fall, before picking it up. When the buyers return they often will push the stock back up to where the bottoming took place. This is why after a bottom is put in place,  it is worthwhile buying or trading dips.

With CNR Stock looking like a bottom is in place, any dip is probably an opportunity. That is certainly my position on the stock and yesterday I sold more naked puts at the $72 put strike for July 17 expiry for $1.27.

CNR Stock Trade Details – Stock at $73.04

June 15 2016 – Sell To Open (STO) 7 naked puts July 17 expiry at $72 put strike for $1.27.


Disclaimer: There are risks involved in all investment strategies and investors can and do lose capital. Trade at your own risk. Stocks, options and investing are risky and can result in considerable losses. None of the strategies, stocks or information discussed and presented are financial or trading advice or recommendations. Everything presented and discussed are the author’s own trade ideas and opinions which the author may or may not enter into. The author assumes no liability for topics, ideas, errors, omissions, content and external links and trades done or not done. The author may or may not enter the trades mentioned. Some positions in mentioned stocks may already be held or are being adjusted.

CNR Stock Internal Links

Review all Canadian National Railway Stock Strategy Articles

Leave a Reply

Your email address will not be published.