Newell Rubbermaid Inc. (NWL) is showing subtle signs on the chart that suggest it may be preparing to take a respite from the 48% rise that took it from $10.87 on Oct. 4 to $16.07 on Nov. 3. All good things must, if not come to an end, at least take a coffee break.
On the face of it, NWL's chart couldn't be more bullish. It broke through its 20-day highest high on Thursday and has pulled back only slightly today, and is up intraday.
The explosiveness of the rise is shown by the high average directional index. The price channel from early October is very much intact.
The 10-day moving average is well above the 40-day and continues to rise. True, the 50-day moving average remains below the 200, but that just means the most recent price increase was rapid.
The weevil in the dinner roll is the relative strength index (RSI), a momentum indicator that compares higher closes to lower closes. That ratio is now at 73.0%, in overbought territory, but that's not surprising, given the speed of the price rise.
What makes me bearish is the pattern of the RSI. On Oct. 28, it made a high of 76.3%, and on Nov. 2, it made a second peak, but lower, at 74.0%, and since then it has declined a percentage point to today's level. And it traced that pattern while prices were rising.
This is known as an RSI divergence, and it is considered to be a very reliable indicator that a reversal is imminent.
Another bearish pawprint is the standard deviation chart, which draws a line through the center point of all closing prices for the past 21 trading days -- a linear regression -- and then puts parallel lines at one and two standard deviations from the regresson line.
In statistics, there is a 68% chance that prices will remain within the one standard deviation boundary, and a 95% chance that they will remain within two standard deviations. (Nice odds -- wish I could get those in Vegas.)
NWL on Thursday peeked above the the two standard deviation line, and then pulled back, and today has traded below that level.
Those two indicators spell reversal.
Of course, no trader should open a position without an exit strategy, a principle the Occupy Wherever folks should study. Having made a bear play on NWL, when do I decide that I was wrong?
A close above the two standard deviations level would be one good signal that I should take my loss.
A new high, above 76.3%, on the RSI would also be a signal to close the position.
Fundamentally, I'm fairly neutral about NWL. There's nothing really to hate about it and actually quite a bit to like. The return on equity is 23%, which is growth stock territory, but the debt/equity ratio is 0.95, which is way too high for my taste. And it's frankly not an exciting market. I have Rubbermaid shelves in my basement and find them to be quite adequate for the task, but I love my iPhone more.
- phase: 20-day price channel phase, with green for bull trend, red for bear trend and yellow for neutral trend.
- trend: Price direction, green for higher highs and higher lows, red for lower highs and lower lows, yellow for sideways, and grey for neutral or ambiguous.
- adx: Average directional index location, indicating the strength, or the temperature, of the trend. Orange for 40 or greater, aqua (light blue) for 25 and up but below 40, magenta (light purple) for 20 and up but below 25, and brown for anything below 20. (Mnemonic: Orange for the overhead sun, blue for the surrounding sky, magenta for sunset on the horizon and brown for the earth.)
- 200/50: The moving average cross, green for the 50-day ma above the 200, red for below and yellow for closely aligned.
- 40/10: The moving average cross, green for the 10-day ma above the 40, red for below and yellow for closely aligned.
About my trading methods
Read a detailed explanation of my analysis method, including trading rules.
Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.
The trader’s greatest sin is inaction. Sleeper, awake! Seize the Nietzchean moment. Roll out of bed and trade.