This Fallen Cigarette Stock Is Ready For A Big Turnaround

Monday, April 13, 2015 - 10:30am

by Michael Kahn

While most cigarette stocks had a successful 2014 on the charts, the sector behemoth by market capitalization -- Philip Morris International (NYSE: PM), weighing in at $120 billion -- headed mostly south. Through its April 1 low, it shed 18% from its June 2014 peak above $91. 

The good news is that PM reached long-term support from its 2013 low and, arguably, the bottom of a giant trading range originating in early 2012. The question for traders is whether this support will hold, and there are many reasons why I think it will. 

For starters, there is a positive condition in short-term momentum indicators such as the Relative Strength Index (RSI). While price set a lower low in April than it did in March, RSI set a higher low. This divergence between the two suggests that the price decline is weakening. 

Along that same argument, price action also set what I call a divergence within Bollinger Bands. The bands are based on volatility rather than a set percentage and offer an interesting way to look for pending trend changes. 

When prices moved below the lower band in a downtrend, it told us that the stock was under intense selling pressure. But when they set a lower low, this time back within the bands, it became another indication that conditions are starting to change for the better. 

Cumulative volume, which I like to use as a proxy for money flowing into and out of a stock, offers additional encouragement. Although prices are way down since last year's peak, this indicator has been essentially flat. I interpret that as a lack of investors fleeing the stock. Supply remained contained and demand held its own, which was on the bullish side in a falling stock. 

To be sure, these are not buy signals on their own, but they do set the stage. Short-term traders may wish to wait for a breakout above a short-term moving average such as the 20-day exponentially smoothed average, currently near $78. Phillip Morris is flirting with this average, but conservative traders can wait for a close above it. 

However, if we look at the bigger picture, the stock held long-term support, it is the weak link in an otherwise strong sector, and it sports encouraging signs in both momentum and money flow. If PM starts to move higher, it would have the wind at its back as it catches up to the rest of its peers. 

While we wait, getting paid a fat 5.1% dividend yield makes it worth the shot. 

Unfortunately, the next ex-dividend date will not be until late June. But for those of you who wish to generate income on shares now, you can hold PM's shares in a high-income brokerage account. A regular brokerage account doesn't allow you to do anything more than simply buy and sell stocks. But if you hold your stocks in a high-income brokerage account, you can collect income each month -- $1,200 or more in some cases. Most investors can easily convert their existing brokerage account with no hassles at all. 

If you want to learn more about how to open a high-income brokerage account and start collecting monthly income now, check out this free report

Recommended Trade Setup:

-- Buy PM at the market price
-- Set stop-loss at $74.25
-- Set initial price target at $85 for a potential 9% gain in 10 weeks 

This article was originally published on ProfitableTrading.com: This Fallen Cigarette Stock is Ready for a Big Turnaround

Michael Kahn does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC owns shares of PM in one or more of its “real money” portfolios.