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When trading, it's always a good idea to have a well-tested plan. But today's trade goes far beyond that, with three trading strategies telling us it's time to get long today's pick, topped off with a nice chart.
The technology sector is making a comeback after being dragged down by its heavyweights. Indeed, this is my third tech pick in a row. I spanned the sector from a semiconductor stock to a software maker, and now we have NetApp (NASDAQ: NTAP) from the cloud storage area, which is poised to climb to fresh 52-week highs.
The first strategy telling us to get bullish on NTAP is a top-down approach, which involves buying stocks in a strong market, improving sector and rallying sub-sector.
They say a rising tide lifts all boats, which means that a strong market is likely to push most stocks higher. And if technology as a whole looks good, then the odds that any individual tech stock will rally are also good. Finally, if the storage subgroup also looks bullish -- and it does thanks to the strong performance of Western Digital (NASDAQ: WDC), Seagate Technology (NASDAQ: STX) and others -- then the odds that another storage stock will follow suit are also good.
The second strategy is simple trend following. As in physics, an object in motion stays in motion unless acted upon by an unbalanced force. In the market, that means a stock's trend tends to persist unless something happens to stop it. That something can be a poor earnings report, a change in the business climate or simply an extreme overbought condition.
NTAP is a member of the NYSE Arca Disk Drive Index (DDX), which morphed over the years from an index of companies making hard drives to flash storage to the cloud. One look at its chart shows a rising trend in effect since a major upside turnaround in May.
This weekly chart displays very clear trends over the past few years, with the 40-week moving average (which is equivalent to the widely watched 200-day average) providing a good indication of when the trend changed direction. Most recently, NTAP broke through that moving average in a big way in July, shortly after the current rally began.
Not shown is the 10-week moving average (the equivalent of the 50-day), which crossed above the 40-week in July for what some chart watchers would call a "golden cross." While this long-term bullish signal usually applies to the market as a whole, the spirit of the shorter average turning ahead of the longer average helps confirm the major trend change here.
The chart of NTAP below shows a choppier rising trend this year and a pullback from the recent high at $39. This is where the third strategy comes in.
Given that we have a strong sector and sub-sector, stocks that are lagging but showing signs they are ready to play catch-up with their peers make great bullish candidates.
With the strategy, I typically like to find stocks that are a lot lower within their 52-week ranges than NTAP currently is. But based on its chart, NTAP has plenty of room to run before encountering resistance, so we can consider it a "buy the dip" candidate.
However, keep in mind that just because a stock in a strong sector pulls back is not reason enough to buy. Rather, we need to either see a breakout or see something that warns of a pending breakout. In NetApp's case, we saw a new high in on-balance, or cumulative, volume, shown at the bottom of the chart. So, even as the stock pulled back recently, money still flowed in, meaning traders were likely taking the ask price as demand remained strong.
And today, we're seeing shares start to break out, up roughly 2% this morning.
I see NTAP heading toward chart resistance in the $44 area, defined by several important highs seen in 2012, 2013 and 2014, which is about 20% above recent prices. It won't happen overnight, of course, so be prepared to ride out the market correction I think is likely to happen at some point in the near future following the Trump rally in the broader market.
Alternatively, using a strategy with a 96% win rate, you could get paid to wait to buy shares in the event of such a pullback. So, if shares drop to your specified level, you get to buy them at a discount. And if they don't, then you get to keep the income free and clear without having to buy anything. If you're interested in exploring this alternative trade avenue, follow this link.
Recommended Trade Setup:
-- Buy NTAP at the market price
-- Set stop-loss at $34
-- Set initial price target at $44 for a potential 20% gain in 12 weeks
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