HPQ - Hewlett Packard Enters Profit Taking Area

5 févr. 2017HPQ

HPQ is entering a take profit area. A lmt order can be set around the $15.30 level up to around $16.50 with a chance of getting filled over the next week depending on your expectation. Late December and January represented buying and accumulation phases.

About the Analysis

The first step in this trading method is to pick stocks that are likely to outperform. In my opinion it is useful to use fundamental screening for this, but technical screens like moment can be applied. More importantly the screen needs to be backtested for outperformce. Using Portfolio123 and a buy and hold approach for the screen HPQ shows up in, has been circa 18% on average over the past 10 years just targeting S&P500 stocks. Screens on smaller cap stocks show much higher returns.

Next step is if I find a stock I think "should outperform" from the screen I want to pick it up for as low a price as possible in the short term. Risk is managed using diversification and staggered entries (i.e. not buying a full portfolio on the same day) as opposed to a stop loss.

So, when the squeeze momentum indicator is bright green as shown in the chart I'll buy using a limit order. When a period of falling prices comes along, identified by the bright green highlight in the squeeze momentum indicator it means I can probably set a limit order below the current price and expect to get filled in the next few days.

Once in a position and the indicator goes dark green it is confirmation that price direction is changing back to UP. It's still ok to buy here but once the indicator goes red this is when price is "and has" already rallied, sometimes strongly in the short term. Meaning LMT orders can be placed to take profit (or loss if I get it completely wrong) and exit. The good thing is LMT orders can be placed above the current price as there is good chance price might continue to rally in the short term and reach the limit price. Trailing stops could also be implemented to ride a trend as long as possible in the take profit zone.

The key to the strategy is picking stocks that might outperform. This method gets killed in downtrends when you have to wait for a short term rally to exit (backtesting shows it is better to wait than use stops), hence why stock selection is so important. BUT works well in general.

A 150 day moving average could also be used as a filter to make sure trades are taken in sync with the trend. The issue will be that final position that get filled before a trend change to the downside comes along.

Suggestions on risk management welcome, in particular ideas on how to avoid that potential big loss appreciated.