4 ‘homes in the range’ for strategic investors

Range-bound stocks are reliable if you buy on a bounce off the floor and sell at a ceiling of resistance. Regular Investor’s Digest columnist Keith Richards names four range-bound securities that reliably follow a price-range pattern to profit from this stock trading strategy.

If you read my Investor’s Digest of Canada articles regularly, have read my book Sideways, or watch my BNN appearances, you will know that I favour certain trading patterns to time my entry and exit points.

My favourite pattern for a mid- to long-term trade is to buy out of consolidation (which I refer to as a ‘Phase 1 bottom’ in Sideways). A recent example of this would be the Japanese Nikkei exchange—which I took advantage of for our ValueTrend Managed Equity platform via the iShares Japanese Fundamental Index ETF CAD-Hedged (TSX—CJP) a few months ago. Charts show the broken downward trend, consolidation, and breakout from that consolidation I like to trade out of.

I also like buying into an uptrend, but prefer to wait for a pullback and successful test of a trendline. One example of a stock that we hold in our equity platform that is in such a long-term trend line is Alphabet Inc. (NASDAQ—GOOGL). This stock has been trending nicely since 2009. Buying on a trend-line pullback has been a good investment strategy over the long haul for this stock.

The final way I like to spot technical entry opportunities is to identify stocks that are trading range-bound. Range-bound stocks move up and down predictably within a tight range. The trick is to buy on a bounce off of a floor of support, and sell at a ceiling of resistance. If you buy and then experience a downside break of support, prepare to sell out after waiting a few days. The bottom line is to take a small loss and move on.

A break of long-held support is bad news most of the time. Just ask DH Corp. (TSX—DH) stock owners what happened when its one-year support of $28 was violated recently! Conversely, sometimes a stock will break through overhead resistance, and move on to new highs. I’m inclined to just trade the range by selling at the ceiling and move on, but that’s me.

Four range-bound stocks

At ValueTrend, we have been trading Fomento Economico Mexicano SAB de CV (NYSE—FMX), Mexico’s version of Alimentation Couche-Tard Inc. (TSX—ATD.B), which, by the way, is not a range-bound stock. FMX, on the other hand, has been stuck in a trading pattern since 2013. The stock gyrates rhythmically between the mid-$80s to just under $100.

It has not broken out of this trading zone for three years, and there is no end in sight for the pattern to end. While disturbing for the long-term investor, FMX offers a predictable pattern for traders.

We recently exited our position in the stock at around $98 a share (after buying at $88), and are looking to buy back in if it gets back into the high $80s.

Here in Canada, we have a few sideways range-bound stocks worthy of the adept trader’s consideration. Stantec Inc. (TSX—STN) has been stuck trading up and down between the high $20s and the mid-$30s since late 2013. It’s at the bottom of that range right now.

Cogeco Inc. (TSX—CGO) is another Canadian name that has been stuck in limbo since 2014. Buying at just under $50 and selling in the mid-to-high $50s has been a wonderful opportunity for those who like a quick and profitable stock trading plan. Cogeco Communications Inc. (TSX—CCA) is a related trade with better liquidity.

The Canadian utilities sector largely consists of electrical utilities like Fortis and Canadian Utilities. The BMO Equal Weight Utilities Index ETF (TSX—ZUT) represents that sector nicely, and is one I have traded in the past. This ETF seems to move quite predictably from about $14 a share on the low end to about $17 at the top.

Right now, it’s at the high end of its trading range, suggesting the sector is due for a significant pullback. We don’t hold this ETF at this time. Traders should consider selling the shares now and wait for a pullback into the $14 range to re-enter the trade.

Sideways-trading securities allow investors to exercise a disciplined trading plan for risk control and profitability.

Keith Richards, portfolio manager, can be contacted at krichards@valuetrend.ca. He may hold positions in the securities mentioned. Worldsource Securities Inc., sponsoring investment dealer of Keith Richards and member of the Canadian Investor Protection Fund and of the Investment Industry Regulatory Organization of Canada. The information provided is general in nature and does not represent investment advice. It is subject to change without notice and is based on the perspectives and opinions of the writer only and not necessarily those of Worldsource Securities Inc. It may also contain projections or other “forward-looking statements”. There is significant risk that forward-looking statements will not prove to be accurate and actual results, performance, or achievements could differ materially from any future results, performance, or achievements that may be expressed or implied by such forward-looking statements and you will not unduly rely on such forward-looking statements. Every effort has been made to compile this material from reliable sources; however, no warranty can be made as to its accuracy or completeness. Before acting on any of the above, please consult an appropriate professional regarding your particular circumstances.

 

 

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