I see a relatively low-risk buy setup in Whirlpool (WHR): The stock is currently above both the 50- and 200-day simple moving averages, with a general pattern of higher highs and higher lows. This is a two-step pattern, one of the setups I watch for every day, and the recent low was put in at $104.06 -- directly within a key price-support decision at $103.15 to $104.30.
Let's look at a couple daily charts, to show you what was inside of this trade-setup decision. Then we'll discuss what we can do with it.
In the chart above, you can see a prior $11.37 decline into the June 26, 2012 low. I projected 100% of this prior decline -- essentially a measured move -- from the Jan. 3, 2013 high. That gave us the $104.30 price projection. As a general rule, 100% projections of prior swings are a great way to help you enter the market in the direction of the trend, as I find that many corrective swings will be similar to others.
Beyond that projection, though, let's look at the most recent data on the next chart so I can show you where the rest of the price relationships came from.
First, there was a 0.618 retracement of point 1 to point 2 that came in at around $103.85. I also had a 100% projection of point 2 to 3 projected from point 4 that came in at $103.15. Finally, the last price relationship in this cluster came in at $104.04, which I calculated by running the 1.272 extension of point 3 to point 4.
Now that you know what Whirlpool's trade setup is -- a two-step pattern into a price-cluster decision from $103.15 to $104.30 -- let's look at the initial buy trigger we've seen here via the 15-minute chart.
Now, the initial buy trigger has already materialized, so the strategy at this point would be entry on a pullback to the recent low. Since I like to use options, this does not have to be a perfect entry. The general range I'm looking at is $106.13 to $108.39.
Whirpool would need to clear the $111.02-to-$111.23 area on the way up, a range that includes a 0.618 retracement and a 100% projection of a prior swing. If it is surpassed, the initial upside target for this setup comes in at the 1.272 extension at the $118.83 area. Target 2 comes in at $122.84. The risk on this setup should be defined below the recent low made at $104.06, or below the low end of the cluster at $103.15 if you want to allow it a little more room. Typically I will look at a call or vertical call spread for my trade entry, but other strategies could be used as well.
If the trade starts to play out, move to a break-even stop when it makes sense -- but not too quickly, or you can knock yourself out. Use common sense. Then trail it up as it goes. You can look to exit when either target 1 or target 2 is met, or you can let the market take you out by just continuing to adjust a trailing stop.
If Whirlpool ends up violating the low end of this price cluster at $103.15, then the setup will have proven itself a bust and it'll be time for me to go back to the drawing board!
