This Could be the Best Trade You Make After the Fed Meeting
The odds of correctly guessing whether the Federal Reserve will raise short-term interest rates today or how the market will react are no better than calling a coin toss. But there are plenty of stocks exhibiting clear technical patterns just waiting for a breakout one way or the other. And the Fed’s announcement could easily be the trigger.
Prestige Brands Holdings (NYSE: PBH), which sells over-the-counter (OTC) health care products such as Chloraseptic, Compound W and Dramamine, offers just such a trade setup.
The stock, along with its peers in the health products sector, had a great 2015. However, when it cracked late last month as the entire market fell, its technicals changed in a big way.
PBH scooted to a fresh 52-week high of $51.74 on Aug. 18, but then quickly sliced down through its rising trendline from November 2014. Not only that, but it fell below its 50-day moving average as volume on down days started to swamp volume on up days. This turned cumulative or on-balance volume sharply lower. What was once a stock in high demand is now one of high supply.
Since late August, PBH has traded in a tightening triangle pattern as volume dried up. The same can be said about most of the rest of the stock market though, so this by itself does not make for a trading opportunity. What does make this an interesting trade is that the pattern is nice and tight following the trend and moving average breakdowns cited above.
The technical bias is to the downside, suggesting the triangle is a bearish continuation pattern. However, in the age of an activist Fed, things are rarely what they seem.
Should the market react positively to the Fed’s decision on interest rates, then an upside breakout from the triangle is quite possible. If that happens, then even higher prices are likely in the near term.
In other words, an upside break should be bought and a downside break should be sold.
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Trading clear technical patterns is a much sounder strategy than trying to guess what a room full of economists is going to do. Keep in mind that what sparks the breakout is not important. Even if the Fed decision wasn’t on tap, we would still look for a break one way or the other from the triangle before trading.
This trade has a limited shelf life. The borders of the triangle are converging, and we do not want to take a trade if prices move sideways through those borders. So if a breakout has not occurred within a week, we will move on to other opportunities.
Because there is so much overhead supply in this stock and in the broader market, I would not expect a sustained upside move. But traders could lock in a nice 6% gain over the next two weeks.
Conversely, while a breakdown here would likely create a “head for the hills” selling panic, whether that will translate into a bear market is another question. So I would likely take the money and run.
Recommended Trade Setups:
— Buy PBH above $47.50
— Set stop-loss at $45.75
— Set initial price target at $50.50 for a potential 6% gain in two weeks
— Sell PBH short under $45.50
— Set stop-loss at $46.85
— Set initial price target at $39.60 for a potential 13% gain in two weeks