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Analysis

Stock Picks: These two stocks are likely turnaround candidates

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The S&P 500 will remain range bound until it breaks out of 2500 or breaks down below 2400 levels. Therefore, we have to be more stock specific in our approach because a few stocks will continue to rally while the index consolidates. As the index lacks momentum, this week, we have chosen a few stocks that are possible turnaround candidates.

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Key points

  1. The S&P 500 is range bound, however, individual stocks are likely to outperform
  2. We have adopted a bottom-up investing approach in this article
  3. We believe GPRO and AEO are turnaround candidates

Though risky, such stocks can offer huge returns if our analysis proves to be correct. However, if the company fails to perform according to our expectations, stocks can fall lower. Therefore, you should always strictly adhere to the recommended stop loss. Also, once the stock moves in your favor, please keep trailing the stops higher.

As long as the S&P 500 remains above 2400, we shall continue to look for buying opportunities. We shall become negative on the markets only if the index breaks below 2400 levels. We have identified two stocks that are showing signs of a turnaround, both fundamentally and technically.

Let’s analyze the stocks.

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GoPro – (NASDAQ: GPRO), Buy at the current levels, SL 8, Target 15 and 18

GoPro is an action camera manufacturer founded in 2002. The stock has been languishing near its lows due to its weak performance in the past few quarters.

However, the recent results and guidance shows that the company is on a turnaround path. It has recorded higher revenues and better margins in the second quarter of this year and has forecast that it will meet the higher end of its guidance for the third quarter. This shows that demand for their products is increasing.

It has a few top end products lined up for launch, which are likely to boost both the bottom line and the top line of the company. This has rekindled hopes that the company will be able to turn profitable if the new launches are successful. This hope is pushing the stock prices higher.

Additionally, the upgrades by Goldman Sachs from Sell to Neutral, and by Morgan Stanley from underweight to equal weight has also boosted prices. However, a lot hinges on the new product launches. If these fail to generate interest among consumers, the turnaround story will fall flat on its face. Nevertheless, if the products are a success and the company turns profitable, the stock is likely to be re-rated and the investors can reap huge rewards.

Weekly chart

The long-term chart of GPRO looks scary. It has lost about 90% from its highs of $98.47 in October 2014. The stock had fallen to $7.15 levels in March of this year. Since then, the stock is on the mend and is showing signs of bottoming out.

A breakout above $11.1 will start a new uptrend in the stock, which should can take the stock to $15 levels.

Daily chart

The daily chart shows a base formation, with the stock taking support at $7.5 levels. It has formed an inverse head and shoulders bottom, which will complete on a breakout above $11.1. On August 4, the stock had gapped up sharply, however, it could not breakout of the overhead resistance. Selling close to the $11.1 levels pushed the stock back down to about $8.5 levels. However, the stock has again gapped up on September 7 and is again attempting to breakout above the neckline.

We recommend entering 50% of the allocation size at the current levels, keeping a stop loss of $8. The remaining 50% allocation can be purchased when the stock breaks out of $11.1. The minimum pattern target is $15, though the stock can surprise on the upside and even reach $18 levels. Therefore, the risk to reward ratio is favorable.

American Eagle Outfitters, Inc. – (NYSE: AEO), Buy at the current levels, SL 9, Target 19

The retail sector in the US is going through a disruptive phase, due to changes in consumer behavior and the growth in online shopping. This has led to a sharp fall in the margins and growth of the brick and mortar retailers. As a result, the whole sector has been punished, plunging stocks to multi-year lows.

However, we believe that a few stocks in the retail sector are showing signs of a turnaround. These companies are adapting to the changing consumer needs and are likely to emerge stronger. One such company is AEO, owner of the American Eagle Outfitters® and Aerie® brands.

The company has maintained positive comparable sales growth for ten straight quarters. This shows that the company’s products are able to withstand the cut-throat competition.

However, the increase in sales has not resulted in higher net profit, because the margins have taken a hit, due to promotional offers.

Nonetheless, AEO has increased its online sales, which now accounts for about 23% of the company’s business. This shows that the company is flexible and can quickly adapt to changing consumer requirements.

Also, the low debt to equity ratio provides opportunities to the management to buyout other struggling retail companies. Presently, AEO has a very limited international exposure, which it plans to expand. This will help diversify its business. With these positives in mind, we want to build a position in the stock before it gets re-rated.

Weekly chart

AEO has remained range bound between $10 to $20 for almost seven years. During this period, the stock has fallen to the $10 levels thrice. All these three occasions proved to be a good buying opportunity because every time the stock rallied back to at least $18 levels. This time too, as the company improves its performance, we expect the same trend to play out. We have a clear stop loss at $9, a level that has not been touched since 2009 and our target objective is $19. This gives us a good risk to reward ratio.

Daily chart

On the daily chart, we find that the stock has broken out of the downtrend line and has moved above both the 20-day exponential moving average (EMA) and the 50-day simple moving average (SMA). This shows that the stock is finding buyers at the $10 levels. Therefore, we can buy the stock in a phased manner, purchasing about 50% of the total allocation at the current levels and buying the rest on dips to $10.5 levels. The stop loss for the trade should be a close below $9 level. On the upside, the stock is likely to rally to $14.5, once it breaks out of $13. Thereafter, it has a small resistance at $16 after which it is likely to rally to $19 levels.

 

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.7 stars on average, based on 8 rated postsRakesh Upadhyay is a Technical Analyst and Portfolio Consultant for The Summit Group. He has more than a decade of experience as a private trader. His philosophy is to use technical analysis for momentum trading and fundamental analysis for long-term positions. Rakesh likes to keep himself fit by lifting weights and considers himself to be a spiritual person.




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4 Comments

4 Comments

  1. jgmartin89

    September 13, 2017 at 9:32 pm

    Awesome! Thanks for these. Would be spectacular if you could post more stock picks.

    • Rakesh Upadhyay

      September 14, 2017 at 7:54 am

      Hello jgmartin89,

      Thank you for the appreciation. I would certainly try to search for more such stocks.

  2. felix

    September 14, 2017 at 12:37 pm

    Thanks Rakesh, great job!

  3. Rakesh Upadhyay

    September 14, 2017 at 6:19 pm

    Hello felix,

    Thank you for the appreciation.

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Analysis

Daily Analysis: Dollar Rebounds as Stocks Struggle at Key Levels

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Friday Market Recap

Asset Current Value Daily Change
S&P 500 2731 -0.08 %
DAX 12,451 0.86%
WTI Crude Oil 61.64 0.31%
GOLD 1351.00 -0.32%
Bitcoin 10030 -0.52%
EUR/USD 1.2405 -0.78%

The main US stock indices entered a crucial zone during the overnight session that we have been monitoring throughout the last two weeks, as the line-in-the-sand zone for the correction. Despite that, the question regarding the fate of the move has been postponed for next week, as the S&P 500 and the Dow failed to clearly rally above the zone, while the Nasdaq showed relative weakness after leading the market higher during the bounce.

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S&P 500, 4-Hour Chart Analysis

We are still leaning on the side of the bears regarding the short-term outcome, as the technical damage of the Volatility-Armageddon seems bigger than what a straight-line recovery would suggest. That said, the fundamental news was great today (not counting the latest developments in the Russia-Gate), as the US housing market sent positive signals amid the rising yields, while the UOM Consumer Sentiment Index also beat expectations.

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On an interesting note, the rise in yields paused, despite the positive economic news, and in this perverse world that led to a strong rebound in the Dollar, right after the new multi-year highs in the EUR/USD pair during the overnight session.

EUR/USD, 4-Hour Chart Analysis

The Euros weakness helped equities of the old continent is finally showing some relative strength, and the same goes for Japan, as the oversold readings in the USD/JPY pair that we noted also led to a rebound, back above the 106 level. While the bounce slightly helped the negatively diverging benchmarks, the clear technical weakness remains another bearish sign for the coming weeks.

DAX, 4-Hour Chart Analysis

The Dollar’s bounce pushed the price of gold lower too after the encouraging rally, but the Shiny Metal remains just a tad below its rally high, which is commendable, given the improving risk-sentiment throughout the week, even as another short-term correction is possible here. Crude oil enjoyed another positive day, although it remains well below its recent highs, just as the commodity-related risk-on currencies, where we already noted the relative weakness yesterday. That also adds to the cautious outlook for equities even in the face of the 5/5 positive days this week.

Gold, 4-Hour Chart Analysis

Cryptocurrencies

The crypto market continued to show robustness amid the hectic trends in traditional assets, and today’s meager correction adds to the bullish signs that emerged last week and remained with investors throughout this week. While not everything is rosy, with still several coins in dominant downtrends, including Bitcoin and Ethereum, there is clear leadership behind the rally, and if the coming short-term pullbacks remain in-line with today’s move, bulls should have their hopes up

BTC/USD, 4-Hour Chart Analysis

What would change the bullish posture is a return to the “everything moves together with high volatility and bearish volume” regime of the preceding steep sell-off, but, for now, that seems unlikely, and a quiet consolidation this weekend would be just what the doctor ordered for the segment.

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Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.7 stars on average, based on 96 rated postsTrader and financial analyst, with 10 years of experience in the field. An expert in technical analysis and risk management, but also an avid practitioner of value investment and passive strategies, with a passion towards anything that is connected to the market.




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Analysis

Technical Analysis: Cryptocurrencies Show Strength amid Slight Correction

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The crypto segment is trading in a short-term correction, or rather consolidation pattern today, as bullish signs continue to dominate the landscape, despite the pause in the surge. The largest coins are mostly down by a few percent from the overnight highs, but the momentum of the move is not substantial, for now, and several currencies are showing relative strength.

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Bitcoin is hovering around the key $10,000 level after hitting an overnight high above $10,300, with the short-term MACD indicator showing the possibility of a short-term correction. With that in mind, investors and traders should wait for a dip before entering new positions, even as further gains are possible. The next key resistance level is at $11,300 with further strong levels ahead at $13,000, and $14,250, while the line-in-the-sand support is still found between $9000 and $9200.

BTC/USD, 4-Hour Chart Analysis

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Bitcoin Cash, Litecoin, NEO, and Ethereum Classic are all among the stronger coins, while Ethereum is also holding up well amid the weak pullback in BTC. The price of the ETH token has been very stable today after a period of underperformance, and it is still trading well below the next resistance level at $1000, but also significantly above the key support near $850.

We still expect the currency to consolidate more before a clear move out of the downtrend, but investors could still use the dips to boost their holdings. Further support levels are found at $740, $625, and $575, with resistance above $1000 ahead at $1175.

ETH/USD, 4-Hour Chart Analysis

(more…)

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.7 stars on average, based on 96 rated postsTrader and financial analyst, with 10 years of experience in the field. An expert in technical analysis and risk management, but also an avid practitioner of value investment and passive strategies, with a passion towards anything that is connected to the market.




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Analysis

Pre-Market: US Stocks at Make-or-Break Levels as Euro Tests 40-Month Highs

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Traders might be in for another exciting Friday session in the US, as although the coming Chinese year of the dog means that liquidity might be lower than usual, the aftermath of last week’s crash is in a crucial phase. The surge in cryptocurrencies also halted a bit, and all major asset classes look ripe for an action-packed day, including bonds, commodities, and fiat currencies.

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The key levels in the major US indices that we have been monitoring ever since the crash are now in play, with the Nasdaq actually being already above the corresponding resistance zone. That said, apart from the tech benchmark, the Dow and the S&P 500 are hovering right near the “hot” zone, and before a clear move above it, bears could still have their moment, with a possible re-test or even new correction lows in the coming weeks.

S&P 500 Futures, 4-Hour Chart Analysis

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As we noted previously, it’s unlikely that the bull market is dead just yet, despite the fact that we agree with Peter Toogood (really) that “this market is nuts…” from a valuation perspective, but short-term, these are the levels where the bounce should fail, in theory, that is.

At this point, even bulls should take a step back, and wait for the next pullback before jumping in, as the short-term indicators are stretched, while bearish traders could be looking for entry points today, and long-term investors could just enjoy the show.

Heavy Trading in Forex Markets

Although equities and Treasuries are mostly in the headlines, the most important forex pairs are also very active, with the Euro, the Dollar, and the Yen all being pushed around by the quick repositioning of the big players.

EUR/USD, 4-Hour Chart Analysis

This creates a great day-trading environment, with clear, significant swings in both directions, within the strong trends. The Dollar is generally trading lower since the bounce started, and the EUR/USD pair already managed to reach a new 40-month high during the Asian session, before turning lower in European trading.

USD/JPY, 4-Hour Chart Analysis

The USD/JPY pair traded with a 105 handle today, again a more than 1-year low, and the trend looks clear, even as the short-term picture is oversold. Gold might also be preparing for a new multi-year high, so everything looks set for more fireworks in currencies too. Stay tuned.

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Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.7 stars on average, based on 96 rated postsTrader and financial analyst, with 10 years of experience in the field. An expert in technical analysis and risk management, but also an avid practitioner of value investment and passive strategies, with a passion towards anything that is connected to the market.




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