- Hormel has been consolidating since its peak in early 2016
- The stock now trades at a critical support area
- Buying HRL now is relatively low risk as a further drop would signal it's time to sell
Hormel (NYSE:HRL) has treated investors well over the years that stood pat and held the stock through it's epic run from 2009 through early 2016 when it peaked at $45.72 per share. But since that time the stock has been relatively uneventful, consolidating previous gains.
It's easy to see this progression when looking at a weekly chart:
But I believe now is a great time to buy Hormel for the simple reason that the $33 per share mark is strong support. With the stock trading just above this level it gives us a clear line in the sand to define our risk. Let's take a look at the daily chart to get a feel for the significance of the $33 level:
Notice how Hormel has touched or come close to touching the $33 level several times since mid-2016. The stock has been consolidating in a range that continues to tighten, but support is clearly at the $33 level.
The odds of another bounce off support are pretty good. And these are exactly the kind of setups I look for when taking a trade or getting long a stock.
What happens if we fall below $33?
Just because a certain price level has proven to be support in the past does not mean it will continue to hold as support going forward. So we need to be prepared for the chance that Hormel falls further. What's our next support level?
The best thing to do is to zoom out to the weekly chart again:
The red line you see there is the 200-week simple moving average. It currently comes in at a price of $30.82. If the stock were to fall further, I'd expect that area to offer at least some support. If you really love Hormel, it wouldn't be a bad place to add more stock to your long-term holdings.
That said, eventually I expect Hormel will head higher again, break through the blue trend line resistance you see in both charts above, and begin a new bull trend.
How to trade it.
The first way to trade this setup in Hormel is to simply buy the stock outright at just above $33 per share. Your expectation would be that we're nearing the end of the consolidation period and a new uptrend is likely to begin in the months ahead. If the stock drops, you could add more to your position at the 200-weeks simple moving average. And if it heads higher, you could add more on a break above the blue trend line resistance.
Regardless of how you decide to execute a pure long stock position, a stop lose below the 200-week moving average, at say perhaps $30 per share, seems logical.
A second way to play this setup in Hormel would be to sell puts. This is actually what I've done this morning. I sold the Jul21 $35 puts for a credit of $2.07
This means that if Hormel trades below $35 per share after the markets close on July 21st, I would get the stock put to me at a share price of $35. However, I would keep my $2.07 premium so my cost basis is actually $32.93 per share.
At the end of the day, I'd be happy enough to buy Hormel at $32.93 based on the above analysis. But I'd also be ok not buying Hormel and collecting my premium (or part of the premium). My investment strategy is always to prolong having my options exercised as long as possible because I'd rather collecting premium.
This is a very similar way I traded Nike (NKE) the other week. However, I would not consider the third trade option I outlined with Nike of selling puts and buying calls because I don't believe the technicals warrant doing so in Hormel quite yet.
What do you think about this trade? Would you be buying Hormel at current levels?
This article was written by
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
I am short Hormel puts.
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