Let’s take a look
The important aspect of this analysis is not trying to pick the bottom of a downtrend or, to take a more ‘trading’ term, catch a falling knife. This is looking for evidence to put probability on our side.
The stop loss is always the support level, or the low of the entry week. The reasoning? As stock prices find support, there will be a build of early holders. A break of the support level will force stops to be taken and attract short sellers to trade in line with the trend.
Four equities in the materials sector posted a negative return for 2016. Syrah Resources (SYR) were down 21%. Brickworks (BKW) closed 13% lower. Incitec Pivot (IPL) was also down 10%, and Boral (BLD) finished the year 1.7% lower.
The stocks are shown here in a weekly timeframe with the relative strength indicator. The relative strength is set at a value of 7 as this makes the indicator more sensitive in this longer weekly timeframe. A swing buy signal occurs when the RSI falls below the 30 level and rises back above 30 but does not cross 50. The indicator line is then required to fall below 30 again and rise to break the previous high.
The weekly chart of BKW brickworks sets up the relative strength swing buy signal as the stock crosses the $13.10 level, currently brickworks is retesting this level. Should support be found here and the stock price moves back over the recent high a new trend will be place, higher price probability is now on the side of the long position trader.
SYR Syrah resources
This is the most interesting of the four charts with a breakout of the longer-term trend line, a swing buy signal in place, and this week a move above the first resistance level. The trend has not been proven as yet; a retest of the $3.45 resistance level would be expected.
IPL Incitec Pivot
Price action over the past six months has formed a rounding base and the stock has now traded above the significant channel resistance level at $3.50, and moved through the long term down trend. In the short term, the RSI has moved above the 70 level, suggesting price strength. Price is consolidating above the $3.50 level and a future close over this consolidation could be very bullish.
The weekly chart of Boral only shows the stock holding long-term support at this time. The relative strength has made the first swing below the 30 level: the first action required to generate a swing buy signal. A present this does not provide any information for a trading decision as the stock also remains below the downtrend line. One to watch.