Trading in the stock market can sometimes be complicated. It can also be confusing and challenging to know what trade to make and when to make it. However, there are those trading opportunities that are clearer and more obvious. Usually, the “keep it simple stupid” trades tend to be the best. Although “simple” doesn’t mean that the trade will work out in your favor, at least you knew it was the right trade at that time. A stock that might have made a move that fits that description would be that of CareFusion Corporation.
CareFusion Corporation is a global medical technology company. CareFusion offers product lines in the areas of IV infusion, medication and supply dispensing, respiratory care, infection prevention and surgical instruments. CareFusion’s primary product brands include Alaris IV infusion systems that feature its Guardrails software; Pyxis automated medication dispensing systems that provide medication management and Pyxis automated medical supply dispensing systems; AVEA and Pulmonetic Systems ventilation and respiratory products, and Jaeger and SensorMedics pulmonary products; ChloraPrep skin antiseptic products that help prevent vascular and surgical-site infections and MedMined software and surveillance services, and V. Mueller surgical instruments and related products and services. It operates in two segments: Critical Care Technologies and Medical Technologies and Services.
Please take a look at the 1-year chart of CFN (CareFusion Corporation) below with my added notations:
CFN had been holding a very important level of support at $23 (navy) for the last (5) months. No matter what the market has or has not done since August, CFN had not broken below $23 . . . until last week. Stocks that break significant resistance usually move higher and stocks that break significant support tend to move lower. As an example, notice CFN’s previous level of support at $26 (green). Once the stock broke below that level in August, the stock fell down to the more recent $23 level. In addition, that $26 support ended up becoming a very strong $26 resistance (red), as one would expect.
The Tale of the Tape: The trade on CFN is pretty simple: The stock had a very important support at $23 throughout the last several months. Last week the stock broke below that $23 level, thus should be moving lower. The most ideal entry to limit risk would be to enter a short position on a rally back up to $23, if that were happen, with a stop placed above that level. A break above $23 would negate the forecast for a move lower and a long position could be considered instead.
Before making any trading decision, decide which side of the trade you believe gives you the highest probability of success. Do you prefer the short side of the market, long side, or do you want to be in the market at all? If you haven’t thought about it, review the overall indices themselves. For example, take a look at the S&P 500. Is it trending higher or lower? Has it recently broken through a key resistance or support level? Making these decisions ahead of time will help you decide which side of the trade you believe gives you the best opportunities.
No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade. Capital preservation is always key!
Christian Tharp, CMT