Is United Continental Holdings (UAL) ready to take off next week? Of course I should be in the penalty box for the poor pun, but it is a valid question. Given the history of the current technical setup, the odds are with the bulls. First, let's review the setup. Then we'll jump to the history.
UAL has been trading in a very wide descending wedge. This is important because any close below the wedge support, around $59, should stop out bulls. Resistance doesn't come into play until near $68, so from the start we have a $6 upside against a $3 downside. It's great to have an upside twice that of a downside, but not so great if the odds of seeing the upside are low.
This isn't just about price, though. In fact, price is secondary. This is about the current technical setup. The buy here is based on the bullish crossover in the slow stochastics while in oversold territory. This isn't a single trigger, though, without contingents. The buy doesn't trigger unless the 8 period Relative Strength Index (RSI) was under 30 (oversold) two days prior to the crossover. A further trigger of the Commodity Channel Index under -100 when the stochastics crossover takes place is also a consideration. I did not use that on UAL given its history with the signal as it stands with stochastics and RSI, but if using a large group of stocks for a scan, I would give it some consideration as it limits the number of hits without impacting success.
How has this pattern performed? Probably better than the on-time arrivals and departures of the airline. Over the past five years, as you can see on the chart above, this trade has been profitable 23 times while registering a loss nine times for a 71.88% win rate. It does help to know what factors are used here. I based this backtest off a $5,000 size position with a stop loss of $275. I triggered a 20% trailer once the position was up $175. That's it. Nothing more. This strategy, assuming a 1 cent per share commission structure, managed to average almost $112 profit per trade, or 2.24%. Over the last five years, traders would have found themselves with a UAL trade only 7% of market days, but even if this was your only strategy for $5,000, a 70% total return over five years ain't too shabby.
Moving over to the Equity Curve Line for the last five years, it is clear I didn't pick a great starting point. This one started off in the red for the first four trades. There are periods of sideways movements and drawdowns of $500-$600, but, overall, the curve has been fairly smooth and manageable.
The last chart here shows the Excursion Percent of this strategy. There is one big winner way off in the upper right of this chart, but for the most part, the winners and losers are bunched together. This is intentional. While there could be bigger winners and bigger losers, for that matter, the goal here is consistency. The trailer allows for some winners to keep running, which is why we see some winners in the 9% to 13% range. However, note the losers are all very similar in size. I wanted to focus on risk management. If I test a strategy and see the losers all over the place with some being extremely large, then a red flag comes out. If that happens, then there is a greater risk a single stock or even a single trade could bury me.
This chart provides a nice and quick visual on the first level of risk management. Of course, using price stops based on a price pattern is one adjustment a trader could use for this strategy along with other ideas such as calls or calls spreads, but for now I'm just long the stock.