Southwestern Energy Bounce Ahead?

11/29/11 08:51:06 AM

by Donald W. Pendergast, Jr.

One of the more useful explorations in MetaStock 11 has identified a potential oversold setup in shares of Southwestern Energy.

Security: SWN
Position: N/A

Southwestern Energy (SWN) shares have dropped by nearly $10 since making a significant swing high on October 28, 2011, and are now homing in on a key Fibonacci retracement level. Here's a closer look now (Figure 1).

FIGURE 1: SWN, DAILY. Anytime that you see the money flow holding up during a strong selloff in a stock, you should put it on your watchlist and see if key Fib support levels will act as potential reversal setup points.

Graphic provided by: MetaStock.

Graphic provided by: Deel Oversold Reversal Screen from MetaStock 11.

A good trader tends to keep a watchlist of stocks that have or may soon meet his/her technical and/or fundamental screening criteria, monitoring such lists in the hope of securing entry into a potentially profitable, low-risk trade setup. One simple way for MetaStock users to keep track of various stocks that are in an oversold market condition is to make use of the Deel oversold reversal screen in MetaStock's Explorer. This exploration attempts to locate stocks that, according to the exploration's description, "are not only oversold but oversold to a point where the probability of a reversal is likely." And from what I've experienced from this exploration's output, it does indeed do a good job of locating stocks that may have gone too far, too fast.

Adding a couple of basic (but essential) technical tools to help identify the more attractive potential bounce setups among the denizens of such a list can also help simplify your screening and selection process. First off, once you've run this particular exploration and have your initial output, begin to plot the Chaikin money flow histogram (preferably using at least a 30- to 50-period lookback) on its daily chart, taking special note of those stocks whose money flow histogram is still above its respective zero line. You'll probably have filtered out a large number of the initial output at this point, so just move on to the next step and start applying a Fibonacci retracement grid on the same daily chart, noting the stocks that are at or close to any one of these three Fib levels -- the 50%, 62%, and 79% (100% is also an option).

If you study a lot of charts, you tend to see that more major (tradable) reversals tend to happen near these three Fib levels than at the 38% (too shallow, perhaps) or even 100% or 127% levels. So with these two tools now safely overlaid on our daily chart of SWN, we find that the 34-period Chaikin money flow histogram (CMF)(34) has remained very healthy all during the recent selloff -- which is interesting, considering that the stock is approximately midway between the Fib 62% and 79% retracement levels. For money flow to remain so strong despite such a major correction may be a tipoff that the big money is quietly accumulating SWN in anticipation of a nice bounce higher.

At the very least, the positive money flow/potential support dynamic displayed should be a clear warning against initiating a short sell position at this time, and if that's all a trader takes away from viewing this chart, then at least it's helped provide some sound wisdom that may ultimately help keep an inexperienced, impatient trader out of trouble.

As far as what to look for now, see if a wide-range reversal bar (or multibar reversal pattern) prints at or near the Fib 79% level with the CMF (34) histogram still above its zero line. If you see that occur, then you may be witnessing the birth of a short-term tradable bounce higher in this stock.

By now, you should know that a buy-stop market order is the sanest way to get in on an emerging move (because you would already have momentum pushing the stock higher, should your order be filled) and that a stock in relief rally mode is also an excellent candidate for a profit target kind of trade exit, along with a basic initial stop, of course. No one knows how November will finish out for SWN shareholders, but you can at least use the info in this article to help be better prepared for whatever the stock decides to do in the days just ahead.

Donald W. Pendergast, Jr.

Donald W. Pendergast is a financial markets consultant who offers specialized services to stock brokers and high net worth individuals who seek a better bottom line for their portfolios.

Title:	Writer, market consultant
Company:	Linear Trading Systems LLC
	Jacksonville, FL 32217
Phone # for sales:	904-239-9564
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Southwestern Energy Bounce Ahead?

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