Bullish Reversal Could Lead To A Fast Rebound For This Stock

Wednesday, October 15, 2014 - 7:30am

by Serge Berger

Shares of car rental company Hertz Global Holdings (NYSE: HTZ) have plummeted nearly 40% since mid-August, erasing a nine-month rally in less than two months' time.

The selling began in force after the company withdrew its full-year financial guidance, blaming a shortage of cars due to recalls and costs associated with an accounting error. Analysts have since lowered their earnings estimates, and the losses have been exacerbated by broad market weakness.

But for traders, now is the time to look for seller exhaustion, as they could make quick gains by hopping on a bullish reversal.

Activist investor Carl Icahn is Hertz's largest shareholder, with an 8.5% stake in the company. That alone could be a reason to be interested in playing the long side, particularly at these depressed levels. 

In his usual fashion, Icahn is looking to shake things up at the ailing company and "return it to its former glory." Hertz has already agreed to give three board seats to nominees of Icahn, who has expressed a lack of confidence in the company's current management.

Icahn, who said shares were undervalued when he disclosed his position in the company on Aug. 20, must not be too pleased with the big drop since then.

In general, when the legendary investor takes a position in a company, investors sit up and listen. However, as clearly evidenced by HTZ, this doesn't mean the stock in question will necessarily move higher in the near term. It takes time for activist investors to push their desired changes through, and Icahn has said he is not much of a trader of stocks, but rather a longer-term holder.

Blindly buying a stock on the back of any famous investor's involvement isn't a good strategy. However, with Icahn as a major stakeholder, and given how far shares have fallen, HTZ presents an interesting opportunity for a rebound. 

After hitting an all-time high on Aug. 19, shares fell 39%, retracing roughly half of the entire rally from the higher low in October 2011 to the August 2014 highs. This also took HTZ down to a diagonal trendline that dates back to May 2008. 

HTZ Stock Chart - Weekly

This line acted as resistance until early 2013, when the stock accelerated higher and broke above it. As the saying goes, previous resistance becomes support, and that's exactly what transpired, as it contained the selling in November 2013. Whether it holds as support this time around remains to be seen. 

At the bottom of the chart above, we see the Relative Strength Index (RSI) is beginning to dip into oversold territory below the 30 line.

Trying to catch a falling knife is never a good strategy; however, watching and waiting for a bullish reversal that could result in a powerful oversold bounce can be very profitable.

HTZ is now more than 25% below its 200-day simple moving average, which is a meaningful amount by historical standards. It closed last week below its November 2013 lows, and after Monday's selling, trades at levels not seen since early 2013.

HTZ Stock Chart - Daily

Just about all momentum oscillators on the daily chart have been in deep oversold territory for a few days. While oversold readings can last for some time, they are a signal to watch for seller exhaustion.

If HTZ stages a bullish reversal, the profits could be substantial for those who play the bounce. 

Recommended Trade Setup:

-- Buy HTZ on a daily close above $21
-- Set stop-loss at $19.25
-- Set initial price target at $24.50 for a potential 17% gain in 3-6 weeks

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This article was originally published on ProfitableTrading.com: Bullish Reversal in Oversold Stock Could Result in a Fast Rebound

Serge Berger does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.