With stocks in correction mode lately, low-risk swing trade setups have been limited. However, here’s a hot stock pick in a leading sector that’s setting up for breakout buy entry now.
A vast majority of stocks have been selling off alongside of the major indices in recent weeks, but commodity-based stocks have been an exception to the broad market weakness.
While not as strong as oil, the agriculture sector has held up well during the selloff.
Within the agriculture industry, leading fertilizer producer CF Industries (NYSE:CF) has been one of the strongest and most liquid stocks in the sector.
On Feb 1, we alerted Wagner Daily members that we were entering CF in the model stock portfolio. After our opening buy entry, CF trended steadily higher throughout the day before closing +5.3% above our entry price on the first day. Now, CF is just pennies away from breaking out to a fresh all-time high and building on its bullish momentum.
Continue reading to find out exactly why we bought $CF when we did, then use this powerful knowledge to help you profit from similar buy setups in the future.
CF: A prime example of Relative Strength in a weak market
In Swing Trader Chat, we frequently discuss the importance of focusing on relative strength during a market selloff. If a stock is so strong that it trends sideways to higher while the major indices are selling off, it is typically the first to blast off to new highs when the broad market eventually bounces as well.
That’s exactly what happened with CF, the perfect example of relative strength trading in a weak market.
Here’s why:
- CF was able to hold above its last major swing low in December, while the S&P 500 broke its swing low and settled into a downtrend.
- CF held the 50-day MA, while the S&P 500 traded below the 50-day and 200-day moving averages.
- The relative strength line (shown on the chart below) showed bullish divergence by setting a new high ahead of the stock price.
The three factors above helped to clearly identify the relative strength of CF, which prompted us to add the stock to our internal, relative strength watchlist.
Then, we applied our trading rules to confirm a valid buy setup for potential swing trade entry.
The Technical Buy Setup
Match the annotated chart above with a description of each label below:
A) Price held above the 50-day moving average (teal line).
B) Price again held the 50-day MA with a bullish reversal candle on heavy volume.
C) Price closed above the downtrend line from the all-time high, then followed through the next day on heavy volume.
D) Price action tightened up on above the 20-day exponential moving average on lighter volume.
E) We bought CF in our above the prior day’s high ($70.64 entry), due to the tight price action–which was later confirmed by increasing volume.
Keep in mind that all of the above occurred while the market was under distribution over the past several weeks!
Again, this is an ideal example of a stock with top relative strength in a weak market.
Weekly time frame chart confirmation
The daily chart of CF above shows the trade setup that led to our portfolio entry.
Next, let’s zoom out to the longer-term weekly chart to see the “big picture” that supports the shorter-term entry:
Note the tight basing action above the 10-week moving average (similar to the 50-day MA) in recent months. Specifically, we liked how the price held at support of the 10-week MA for two weeks in a row during the January pullback. The pullback was then followed by a high volume accumulation bar off support of the 10-week moving average.
These positive factors of the CF weekly chart confirmed the bullish setup on the daily chart—which led to our Feb. 1 buy entry in the model portfolio of our swing trading report.
The short-term battle plan
Although our market timing model generated a new “buy” signal on Jan. 31, note that conditions are not yet ideal for being aggressive with new swing trades on the long side.
Nevertheless, we plan to maximize profits by holding CF as long as the price action remains bullish.
We are also monitoring broad market price action while searching for new trade entries with top relative strength and buyable chart patterns.