As I mentioned in this week’s review of open positions and in the stocks to watch post, even as market breadth appears to be deteriorating there are still plenty of stocks out there making new highs or with promising setups. It’s these names that we need to concentrate on and follow on a case by case basis. Judge each stock’s trend on its own merits, not through the lens of a top-down market view with preconceived ideas of what should happen.
When so many names appear to present entry signals it often requires a further filter or criteria, to ‘demand more’ from the trend in order to make sure in such market conditions we are only taking the very strongest signals. One that clearly fits the bill for me is Illinois Tool Works ($ITW), which we’ll enter at Monday’s open.
Illinois Tool Works ($ITW)
$ITW is an idea for which I can’t even take credit, as it was originally brought to my attention by @RogerRafael who is President of the Belmont University Student Managed Equity Fund, and already a great trend follower in the making. He also highlighted $PPG and $AMG which both appeared on my Stocks To Watch list this weekend.
$ITW might be seen as more of a ‘slow and steady wins the race’ type of name, not the momentum type that typically triggers entries for us, but there are many things I like here. Being in a solid long-term uptrend and above its MA’s isn’t enough anymore in this market, so let me just use one chart to show everything that I think makes this the one signal I want to take Monday above many others that presented themselves this weekend.
This is the last 3 months on a daily chart, showing the 20EMA and 50-day MA.
First off, the breakout. It’s clean, it’s emphatic, and it’s on big volume. It gapped, then it ran, and closed right near the highs. I also love the fact that it’s effectively a follow through day, coming on the heels of the high-volume bounce from the 50-day Thursday. It could have just consolidated right there at the 20EMA and still looked good, but instead followed through, and managed to do it on even more volume after reaffirming guidance at its annual Investor and Analyst Day on Friday. That’s great price action.
Second, this is the third successful test of the 50-day in a short period of time. This next bit is borne of experience rather than something I’ve tested (maybe someone can test it for me?), but I’ve observed that stocks which have a cluster of visits can often then undergo a prolonged period before seeing it tested again.
Third, the stop is one based on several data points, the 9/24 swing high at $78.00, the 12/4 pivot low close of $78.12, and the 50-day also currently at $78.00. Given a choice of setups, I prefer to see a stop that also requires a break of a major MA or trendline before it’s triggered, than one that could see you exit while undergoing a test.
Lastly, with a clean break of $78.00 being an unequivocal invalidation point, it gives us an excellent risk-reward trade. Even after a strong breakout, using Friday’s close our stop is only 3% away, so even with a further gap Monday it allows for a very reasonable position size, something that has been harder to come by recently.