Australian Investment Blog

Why do we look at retracement targets to buy stocks

Market Matters is in the minority of the investment world, using both fundamental and technical analysis to make investment decisions. Simply, we believe in using all the tools at our fingertips to make optimum buy and sell decisions. Today we are going explain why we often identify "pullback / retracement targets" to purchase stocks and importantly, what is on the radar at present. Assuming we like both the fundamentals and market valuation of a company, the next important step is identifying good risk / reward areas to buy - sounds so simple.

A company's overall performance dictates its share price on a medium to long-term basis, but the short-term swings in price are largely down to human emotion. "Fear & Greed" are the major two emotions that play an enormous role in the day to day volatility of stocks due to ebbs / flows of optimism and pessimism. Importantly, history tells us that human emotion / characteristics are relatively consistent over time, with events having an uncanny habit of repeating themselves.

Similarly, markets also have an almost spooky ability to repeat themselves, again due to the human emotion influence, which leads to the science called Technical Analysis. Consider the following 3 examples we have picked from the Weekend Report – note, we have not "cherry picked" and there are plenty of other great examples within all the charts covered on the Weekend Reports.

1. BHP has been in a Bear market since early 2014, falling over 60% at its worst, from the $37 area. Amazingly, the stock has managed to bounce $7.28 and $7.20 respectively in that time, leading us to exit our resource based positions in late April after the second bounce - this has proved optimal for BHP and RIO, but not FMG to date. We were happy to take the profits after a second +$7 bounce and sit back and wait to see if the descent is complete, or a major panic low has been formed - we currently sway to a break of $14 in the coming 12 months.

BHP Billiton (BHP) Monthly Chart

2. Westfield Corp (WFD) is a stock that has really been in tune with its own self, having a $1.82 and $1.83 pullback since its major advance commenced in 2011. Our preferred scenario is WFD will now have a ~$2.60 pullback similar in magnitude to that in 2010, from somewhere in the $11 region....note it may get as far as $11.50 before declining, considering that we are bullish equities short term.

Westfield Corp (WFD) Monthly Chart


The US S&P500 is world's most watched stock market Index and one that we watch very closely. Since the current Bull Market commenced in 2009, it has experienced two very similar major retracements of 296 and 325 points respectively. The similarity of the second pullback enabled us to go aggressively long stocks within a day of the panic 1810 low.

Our view as subscribers know is US stocks will now push to new all-time highs, prior to experiencing a much larger correction.

US S&P500 Monthly Chart


Four stocks that this retracement principle is / has recently influenced are Origin (ORG), Vocus (VOC), Henderson (HGG) and Newcrest (NCM) - gold sector:
We still believe ORG will continue this corrective rally over $6.20, BUT we are frustrated that it recently fell shy at $6.09.

Origin (ORG) Monthly Chart $5.69


Vocus (VOC) is a stock that we have been looking to enter after our initial successful foray into the growing Telco stock. Over recent years, it has experienced both a $1.29 and now $1.31 pullback, we are bullish and long, targeting ~$10.

Vocus (VOC) Weekly Chart $8.47


HGG has been our nemesis since BREXIT and we have been looking for areas to exit the stock. We are not panicking at current levels and would be buyers 25c lower, looking for a ~75c bounce to exit the position.

Henderson (HGG) Weekly Chart $3.49


Newcrest and the gold sector have commenced a strong bull rally, aided by BREXIT and we are poised to buy the next decent retracement. We are looking to enter in a $2.50-$3 pullback, similar to that experienced in late March, we do not believe it is time to expect a larger $5 pullback as in 2015. If tonight's US employment data is strong that may easily be the catalyst for such a correction.

Newcrest Mining (NCM) Monthly Chart $26.18


Summary

We are fans of using retracement targets to both exit and enter stocks. Currently, we are looking to exit ORG ~$6.20 and HGG ~$4 and enter NCM into a $2.50 pullback from this style of analysis.

Watch out for HGG which we may average into significant weakness.

Watch for Market Matters alerts.


Overnight Market Matters Wrap

• The Dow finished lower last night, down 23 points (-0.1%) to 17,896 whilst the broader market closed down just 2 points to 2,098.
• Oil again was the catalyst, with the price dropping US$2.29 (-4.8%) to US$45.14/bbl. The report on US stockpiles fell by 2.2million barrels. This number by the Energy Information Administration (EIA) came in just shy of the forecast 2.3m barrels, but it was a long way off the expected number forecast by the trade group American Petroleum Institute late Wednesday, of a 6.7m barrel drawdown. Expectations were high, but the dreams were dashed!
• Gold was weaker, dropping US$5 (-0.4%) to US$1,362.10/oz, leading into the Non-Farm Payrolls number due tonight our time. Last night saw the reporting of the Private Sector payrolls which rose more than expected in June. Analysts were expecting 159,000 new jobs and the figure came in at 172,000. Tonight’s figure is expected to show 175,000 added to the Non-Farm Payroll numbers, a rebound from the drastically weak number from May of 35,000.
• The September SPI Futures is indicating the ASX 200 to open slightly lower this morning, around the 5,221 level, down 7 points.

All figures contained from sources believed to be accurate. Market Matters does not make any representation of warranty as to the accuracy of the figures and disclaims any liability resulting from any inaccuracy. Prices as at 8/07/2016. 9:00PM.

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