Sell This Broken Manufacturing Stock For Big Profits
Last week, I suggested trading against the trend in an oversold stock. For this week’s trade, though, the trend has returned to being my friend — and for Johnson Controls (NYSE: JCI), that trend is to the downside.
This maker of automobile interior systems and building heating, cooling and management systems broke down last month through its intermediate-term trendline, as seen in the chart below.
That came on the heels of the June 10 breakout failure, also seen below, sparked by news the company was considering spinning off its automotive businesses. Initially the market viewed the spin-off as a positive for the company, but it was a one-day wonder rally. The next day, the stock started to fall, and it has not looked back since.
In the face of a series of lower highs and lower lows, the downside trend break and a drop back below the 200-day moving average, we can safely assume the bears are in charge here.
That suggests there is more downside ahead.
For some additional background, Johnson Controls is in the consumer discretionary sector and its representative exchange-traded fund, the Consumer Discretionary Select SPDR (NYSE: XLY), appears to be ready to turn lower.
This may surprise traders, as the fund recently broke out to the upside from its 2015 trading range. However, volume before, during and after the breakout was in serious decline, a textbook bearish warning.
With that in mind, let’s look to see how low JCI can go. The weekly pattern in the chart is a somewhat choppy version of an inverse head-and-shoulders with small troughs surrounding a larger decline last October. Since the breakout failed, we can look for the entire pattern to be erased as the stock falls. That means a trip down to the $39 area from its current position near $47.
Of course, there may be counter-trend moves along the way as the stock trades within a short-term trend channel. But overall, the technicals support lower prices in a gradual move lower.
Recommended Trade Setup:
— Short JCI at the market price
— Set stop-loss at $49
— Set price target at $39 for a potential 17% gain in eight weeks
Note: As I’ve mentioned before, shorting comes with potentially unlimited risk, so many traders prefer alternate strategies for betting against stocks. My colleague Jared Levy has perfected one such strategy — and the proof is in the pudding. In less than a month, he turned a tech stock’s 13% decline into 40% profits. To find out how he does it, follow this link.
This article was originally published on ProfitableTrading.com: Sell This Broken Manufacturing Stock for Big Profits