"Golden Cross" Set-ups with Defined Risk

Jan. 05, 2012 1:04 PM ETWCC, EGC, MENT, PACR
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Tom Aspray, professional trader and analyst was originally trained as a biochemist but began using his computer expertise to analyze the financial markets in the early 1980s. Mr. Aspray has written widely on technical analysis and has given over 60 presentations around the world. Many of the technical indicators that Mr. Aspray wrote about in the 1980s, such as the MACD, have since gained worldwide acceptance. Tom is regular contributor to Forbes where he writes a regular Week Ahead column.  His expertise as a technical analyst has been acknowledged by the WSJ as well as some of the best known technical analysts.

New moving average crosses in these four stocks signal long entry opportunities, and though risk on such set-ups is typically high, clearly defined entry and stop levels are present here.

Many are likely aware of the term "golden cross," which is defined by a short-term moving average (MA) crossing a longer-term moving average. Most often, this refers to the 50- and 200-day moving averages.

On January 3, the 50-day MA for the SPDR Diamond Trust (DIA), the primary Dow-Tracking ETF, crossed above the 200-day MA. The 50-day had been below the 200-day since August 24, 2011.

The performance measures for buying or selling based solely on golden crosses is dismal, but I do feel that they can help identify opportunities in the markets. It should be noted that the 50-day MA on the Spyder Trust (SPY) is still 1.6% below its 200-day MA.

I have also noticed that in many cases, stocks that form new bullish crosses are ones that are also outperforming the S&P 500, meaning they show positive relative performance, or RS analysis.

These four stocks also have positive volume patterns, which allows for clear entry and stop placement.

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Chart Analysis: WESCO International (NYSE: WCC) is a $2.3 billion wholesaler of industrial equipment. The stock hit a high of $64.90 in early 2011 and dropped as low as $31.06 in early October.

  • The daily downtrend, line a, was broken in early November, and after a setback, it surged back above
  • WCC has overcome the 61.8% Fibonacci retracement resistance from the early-2011 highs
  • The moving averages are now just below $50, which represents first support
  • The last swing low is at $48.46 with the late-November low at $44.77
  • The on-balance volume (OBV) broke through resistance at the end of October and is leading prices higher. The weekly OBV (not shown) is also positive

Energy XXI Limited (EXXI) is a $2.5 billion oil and gas equipment and services company. It operates in Louisiana and Texas, as well as offshore in the Gulf of Mexico. EXXI traded as high as $37.20 in May 2011.

  • EXXI shows very strong relative performance, as it has performed four times better than SPY since the October lows
  • There is minor support now at $32 with the moving average support now at $30.13
  • There is much stronger support, line d, in the $28 area
  • The daily OBV made new highs on Monday (line e) and has been very strong since the October lows
  • The weekly OBV (not shown) formed a bullish divergence at the October lows and is above its weighted moving average (WMA)
  • It should be noted that on a seasonal basis, crude oil typically bottoms in February


Click to Enlarge

Mentor Graphics (MENT) is a $1.4 billion technical and system software company. Its automation systems help to design, test, and analyze electronic hardware. The stock peaked in February 2011 at $16.56, but by August, it had lost almost 50% of its value.

  • The 50- and 200-day MAs are now at $12.23
  • The daily chart shows an apparent double-bottom formation (line b) that was confirmed by the move through resistance at line a
  • Due to the double bottom, the $11.90 area now becomes good support, and it also corresponds to the 38.2% Fibonacci retracement support level
  • Daily OBV moved through its downtrend, line c, just after the October lows, but it is slightly lagging the price action currently
  • Weekly OBV (not shown) is above its rising weighted moving average

Pacer International (PACR) is a $188 million freight transportation and logistics company based in Ohio. PACR had a high in 2010 of $9.45 but traded as high as $25.25 in 2008.

  • There is a high short interest in PACR with a current short ratio close to 32. That means it would take 32 days of average daily volume just to cover the short positions
  • The daily downtrend (line d) was broken in the middle of December. Minor support is now in the $5 area
  • The moving averages provide further support at $4.72 with the daily uptrend, line e, at $4.30
  • Daily OBV has also broken its downtrend, line f, and is acting stronger than prices

What It Means: The biggest problem faced when trying to invest or trade based on crosses of the 50- and 200-day MAs is buying right on the cross. This generally requires that a wide stop be used, which then makes the risk/reward unfavorable.

Typically, I look to buy on a pullback towards the 200-day MA and often look at a level that is 0.5% to 1% above the 200-day MA. A stop under the prior swing low will often create a favorable risk/reward trading plan.

How to Profit: For WESCO International (WCC), buy at $50.28 with a stop at $48.22 (risk of approx. 4%). If filled, sell half the position at $59.44.

For Energy XXI Limited (EXXI), buy at $30.44 with a stop at $28.28 (risk of approx. 7%). If filled, sell half the position at $36.32.

For Mentor Graphics (MENT), buy at $12.42 with a stop at $11.88 (risk of approx. 4.3%). If filled, sell half the position at $14.52.

Pacer International (PACR) has the highest risk with the highest potential return. Go 50% long at $5.09 and 50% long at $4.84 with a stop at $4.38 (risk of approx. 11.8%). If filled, sell half the position at $6.45.

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