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One of my favorite strategies is to find a strong group and look for lagging stocks within it that are just starting to play catch-up. It is a variation on the "strongest stocks in the strongest groups" mantra espoused by Wall Street strategists, but I think my modification offers a little more bang for your buck.
Currently, the banks, and especially regional banks, are breaking out to the upside. Leaders in the group, such as U.S. Bancorp (NYSE: USB), have already made some nice gains this month, and even more since their respective October lows. One of my favorites right now is PNC Financial Services Group (NYSE: PNC), which is based in Pittsburgh.
To be sure, the rising tide of a strong sector does not float all boats, especially those with holes in their hulls. Some stocks are down for reasons besides simply being off investors' radar. Therefore, just because a stock is low in price relative to its recent past does not necessarily mean it will rally to catch up with its sector. Indeed, weak stocks tend to stay that way.
So how does this strategy work if lagging stocks tend to keep lagging?
The key is to find lagging stocks that have already proven they are back on the move by rallying with conviction off their lows. PNC fits that bill.
As we can see in the chart, PNC is up 8% from its October low and already crossed the 61.8% Fibonacci retracement level of its July-October decline. Stocks that cross that threshold tend to keep going toward a full retracement.
Cumulative, or on-balance, volume is also rising, suggesting money is flowing into the stock. This is important because it shows the stock being bought more aggressively and not just getting dragged higher with the sector.
Next, PNC is above its major moving averages and is in "proper order" with price above the 20-day average, which is above the 50-day, which is above the 200-day. The trend is now up across all time frames, and that is a positive development.
The buy signal was triggered Thursday as prices moved above resistance at $76. At the same time, indexes covering the regional bank and big bank sectors both rallied through resistance, meaning this is a sector-wide breakout.
There are no roadblocks between current trading and the August high near $78. However, based on the sector's performance, the upside target is projected to be even higher at $81.
Recommended Trade Setup:
-- Buy PNC at the market price
-- Set stop-loss at $74.50
-- Set initial price target at $81 for a potential 6% gain in four weeks
Many investors hold strong opinions about the 200-day MA... but is it actually important?