The chemical stocks are deep cyclicals- they can only trend higher in the later part of an economic cycle. I think we are there. These three stocks’ price action is telling me this. So here are three trades:
$PPG is a leader in the sector. Here we can see $PPG is breaking out of a multi-year high base. The low risk trade is to buy here on the breakout, with a stop below the breakout level. Notice $PPG’s price in relation to the orange line- the 175 week moving average. It is above- which is a sign of relative strength.
Next we will take a look at a smaller company, $SCL that is trailing the big leader. $SCL is just poking its head around $100. A decisive close above par would be a bullish indication that higher prices need to be auctioned to find sellers. Notice the relation to the orange line, the 175 week moving average- again, the price trading above is bullish, but we would like to see the secondary indicators at the bottom of the chart to turn up to confirm our bullish bias.
Last, we look at a really deep cyclical in the chemical space: $KWR. We can see last time the stock tagged the 175 week moving average, it trended higher a good bit. We are back at the same moving average and $KWR appears to be holding for now. The low risk trade is to buy here and stop out if the stock closes below the 175 week moving average. We would like to see the secondary indicators at the bottom of the chart turn up to be more bullish.
So here we have three great trades that should do nicely if we are in fact in the late innings of this economic cycle.
If you are familiar with Van Tharp’s Rvalue trading concept, here are the Rvalue figures for these trades if you buy in the green circles, stop out in the red boxes, and sell at the previous high on the chart:
$PPG: 11R trade, so for every $1 you risk, you make $11.
$SCL: 8R trade, so for every $1 you risk, you make $8.
$KWR: 5.5R trade, so for every $1 you risk, you make $5.5.
For a grand total of risking $3 to make $24.5- that’s not bad! But you would likely have to hold until this part of the cycle is over- at least a year from now, maybe longer. So patience is the key to this type of trading concept.