For those of you who took some time away from that special lady today, I'm going to outline a trade I'm setting up to make tomorrow morning shortly after the open and outline the thesis behind the trade.
First, I'll start with the more traditionally view, then jump into something a little different.
CF Industries (CF) is setting up well on the weekly chart. The stock has been in an uptrend for the better part of two years now. Price action in 2014 seemed to end a bit dicey with a megaphone pattern in the works, but the action in 2015 looks to have a chance to negate that pattern and put it to rest. In fact, CF may be setting up a nice cup-and-handle pattern here with the potential to reach $340 this year. The cup is clear on the chart, as is the stop now at $280, some $20 above the previous support line, which would be the next buy point if the stock fails to break out here.
I'd prefer to see some of the other indicators break out in front of price over the next one to two weeks, normally, but I'll get to why I'm not waiting in a moment. The vortex indicator has flipped bullish, although another week of it staying so would be preferred. Also, I would like to see the TRIX indicator at the bottom cross over in bullish fashion as well. This is simply the 5- and 8-week moving averages smoothed out. Daily chart readers would see this as similar to the 20- and 40-day moving averages without smoothing. It isn't the same, but it is close. Crossovers there, when the Force Index (directly above) is bullish, have been a solid entry. This is a nice combination of price, volume and trend, which has worked well in the past. But these aren't the reason I'm looking to buy CF right now. These would be the reasons to keep it high on the watch list. But instead I'm going to take you somewhere different.
I will try to take some charts off the beaten path and CF falls into this group. One pattern I've been utilizing for swing trades on daily charts is the combination of fast and slow indicators on the parabolic stop and reverse. I've expanded this to weekly charts, but expanded the view a bit. In the case of CF, I'm looking for a fast and slow Psar, which both move from bearish to bullish in the same week. The close Friday triggered such an event, which puts CF on the buy list for Monday morning. This is the seventh time we've seen this pattern occur since 2010. I've highlighted a few on the chart here.
It's important to outline the parameters of the trade and take a look at how it has performed historically. I've included the historical performance in the chart below, but here are some simple parameters. I ran the back test with a mere $2,500 trade, so a size that can fit into many portfolios. The entry is on Monday's open. The stop on this position is set at $225, although $210 has been the optimal stop point. The reason why the position is small is so a trader can treat the position more like an investor and allow for as much upside as possible. So, a trailing stop doesn't kick in until the position is up $650, although some will opt to use a smaller amount like $500. The position is then sold when the low of the previous five bars is broken. The previous six trades have seen two closed due to stop losses and the other four closed on a trailing profit basis. The average time in the trade is right around six months, but there has been a big difference between the winners and the losers. The losing trades have been stopped out quicker at an average of only 25 days compared to the nearly 200-day hold period for the winners. This setup attempts to force the concept of cutting losers quickly and letting winners run.
Finally, I do hope all those mothers out there had a day to spend with their family, get some much deserved attention and a few minutes to just relax.