Major Trend Reversal Projects 15% Upside In This Downtrodden Stock

It is no secret that retail investors have been mostly absent from the stock market in recent years. Foreign currency trading made up for some of the slack, but it has been a rough year for retail-oriented trading firms such as FXCM (NYSE: FXCM).

FXCM’s revenue is primarily derived from clients using its software to make online currency trades. On Aug. 7 after the close, the firm reported a second-quarter loss and a 30% year-over-year decrease in revenue as the company continued to struggle with low trading volume and low volatility in its markets.

But then something remarkable happened.

The next day, the stock fell 6.6% at the open, but it spent the rest of the day rising. By the close it pared the loss to just 1.3%, and a bottom was presumably set. For the next six trading days, FXCM closed in the green as investors piled back in.

Such positive action on the heels of bad news is technically bullish.

FXCM Stock Chart

On the chart, we can see the $12.75 level acted as a spring board for the second time in three months, creating a solid price floor and setting in motion the workings of a major upside trend reversal.

Prices have already moved above the declining bear market trendline drawn from the September 2013 high and the key 200-day moving average.

However, the stock is already reading overbought according to popular momentum indicators such as the Relative Strength Index (RSI). While that does put it in jeopardy of a pullback, it is commonly accepted wisdom in technical analysis circles that it is bullish, not bearish, when a stock reaches overbought readings.

#-ad_banner-#‚ÄčThis will sit better when we consider time frames. An overbought daily indicator suggests a short-term pullback is likely. However, that is likely to create an intermediate-term buying opportunity.

Consider that the stock rallied from the $12.75 floor to its recent price near $15.60 in only five weeks. It pushed through its declining trendline without pausing first, and that suggests there was a momentum component to the breakout. In other words, it was not just a sea change of mood causing the event, and that suggests the extra enthusiasm has to be bled off. A price pause or small dip back to test the trendline from above would not be unusual.

I don’t want to get fancy trying to time the exact price at which to buy, especially since that could happen intraday. Because of the expected upside, there is plenty of potential rally ahead whether we buy at the market or wait for the dip that may or may not come.

The upside target is derived from measuring the height of the April-September range, spike low excluded, and projecting that up from the breakout point. It yields a target of $18, which coincides with the previous time price action touched the 2013 trendline back in January.

Recommended Trade Setup:

— Buy FXCM at the market price
— Set stop-loss at $14.75
— Set initial price target at $18 for a potential 15% gain in eight weeks

By reading into FXCM’s momentum we’re able to find a safe timeframe to invest. My colleague Amber Hestla has also developed a similar strategy and it’s not “dumb luck” that every one of her closed trades is a winner — 52 trades, 52 winners in the past 12 months. Amber’s strategy works. You won’t want to miss her next recommendation.

This article originally appeared on ProfitableTrading.com: Major Trend Reversal Projects 15% Upside in This Downtrodden Stock