Retracements and Moving Averages as Strategic Signals

RELATED QUOTES

SymbolPriceChange
AXP87.41+0.28

Prior to last week's 3.6% bounce in the market (S&P 500), it had been down -8.9% from the highs on 9/14/12 to the lows on 11/16/12.

The S&P, along with the other major indexes, and countless numbers of stocks rebounded sharply after falling below their 50-day and 200-day moving averages.

If you're bullish on the market, you likely see this as a sign that the selling is over.

If you're bearish on the market however, you probably see this as a short-covering rally before the market heads lower again.

Only time will tell which camp is right. And quite frankly, as it relates to individual stocks, it might turn out that both are correct.

For some stocks, the recent bounce is providing another opportunity to sell stocks at a higher price -- whether that's to establish new shorts or to finish up the end-of-year tax selling to ensure one can take advantage of what could be the last time capital gains taxes are this low for a while.

And for others, it was the correction they've been waiting for to get in on some of their favorite stocks.

Retracements and Moving Averages

In general, stocks that drop below their 50-day and 200-day moving averages are looked at as potentially bearish, while stocks that breakout above them are considered potentially bullish. Traders and investors will often key in on these levels as places to buy and sell stocks.

Another often used indicator for buying and selling are retracements. Common retracement levels, as defined by Fibonacci, come in at 38.2%, 50% and 61.8%. These levels are looked at strategically, like the moving averages, as places to either get long or short.

With this screen (2 screens actually) we're going to combine both of these indicators to find stocks that look like bearish retracements and others that look like bullish set ups.

Bearish Screen

For the bearish set up, I'm looking for stocks that have:

  • retraced less than 61.8% of the drop that preceded it
  • and that are trading just under their 200-day moving average
  • with a Zacks Rank of greater than or equal to 3 (Hold, Sell, or Strong Sell)

Bullish Screen

For the bullish set up, I'm looking for stocks that have:

  • retraced more than 61.8% of the drop that preceded it
  • and that are trading above their 200-day moving average (and preferably their 50-day as well)
  • with a Zacks Rank of less than or equal to 3 (Strong Buy, Buy, or Hold)

Of course, nobody should use just the retracement levels and moving averages as their only reason for getting long or short; the Zacks Rank aside.

But these are two popularly watched indicators, and they can help you identify key points as to when a stock is ready to turn around or keep on going in the same direction.

Below are 6 stocks (3 from each of the bullish and bearish screens).

Watchlist to Buy

CHD - Church & Dwight Co. Inc. -- Soap and Cleaning Products Industry. Zacks #2 Rank or Buy. CHD has retraced nearly 100% from of its levels on 9/14/12, when the S&P hit its highs. CHD's own high came just before that on 7/17/12, and has so far retraced 50% of that move.

RLJ - RLJ Lodging Trust -- Real Estate Investment Trust (:REIT) that focuses on full service hotels. Zacks #3 Rank or Hold. After plummeting below its 50-day and 200-day moving averages, it has since surged back above them both and is currently trading within 4% of its 52-week high.

PACW - PacWest Bancorp -- In the Banks-West Industry. Zacks #3 Rank or Hold. Top 23% of Zacks Ranked Industries. Has retraced nearly 100% of its broader pullback and is also trading within 4% on its 52-week high.

Watchlist to Sell

AXP - American Express Company -- Financial Services Industry. Zacks #3 Rank or Hold. After dropping more than -13% over the last few months, it has struggled to retrace less than half of that and is trading right at its 50-day and 200-day moving averages.

BCR - C.R. Bard Inc. -- Medical/Dental Supply Industry. Zacks #3 Rank or Hold. Bottom 30% of Zacks Ranked Industries. Has retraced less than 38.2% from its high on 7/5/12 and has come back up to just under its 200-day moving average.

GGG - Graco, Inc. -- Industrial Machinery. Zacks #5 Rank or Strong Sell. Bottom 16% of Zacks Ranked Industries. Has made a 50% retracement of its recent pullback, but is still trading under both its 50-day and 200-day moving averages, with the 50-day having just crossed below the 200-day last week (bearish crossover).

Get the rest of the stocks on this screen and start using retracements and moving averages in your own stock picking.

Click here to sign up for a free trial to the Research Wizard today.

Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.

Disclosure: Performance information for Zacks' portfolios and strategies are available at: http://www.zacks.com/performance.

AMER EXPRESS CO (AXP): Free Stock Analysis Report

BARD C R INC (BCR): Free Stock Analysis Report

PACWEST BANCORP (PACW): Free Stock Analysis Report

GRACO INC (GGG): Free Stock Analysis Report

RLJ LODGING TR (RLJ): Free Stock Analysis Report

CHURCH & DWIGHT (CHD): Free Stock Analysis Report

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