A trend channel will not last forever, but once it is isolated, it often provides at least one or two winning trades, and sometimes more, before a losing one. The two stocks analyzed in this article have been rising within trend channels throughout the year – channels that have already provided a number of profitable and favorable risk/reward trades. Having pulled back to channel support, another potential swing trade buying opportunity is present.
Aflac Incorporated (AFL) shares pulled back to channel support near $81 in late September. While buying right at the trendline may work on occasion, the more prudent strategy is to let the price move into, or even sightly below, the trendline area and then buy when the price starts moving higher once again. In the case of Aflac, the price made upward progress between Oct. 2 and Oct. 4, warranting a purchase on Oct. 4 or Oct. 5, once the price had recovered from the drop on Sept. 29. (See also: Aflac Q2 Earnings Beat Estimates, Guidance Intact.)
For traders that are even more cautious, the 1.26% rally on Oct. 10 broke above a three-day consolidation, pushing the price further from support. Between $82.30 and $83.00 is a good entry point for this stock, as support has held and the price looks to be heading back toward the top of the channel at $85.30. Traders should consider an exit there, as the price has typically fallen off the top of the channel back toward support over the past year, providing another swing trade possibility. The lower the entry point, the more favorable the risk/reward. An entry near $82.30 with a stop-loss near $81.00 results in a reward-to-risk ratio of greater than 2:1, whereas entering near $83 moves that ratio closer to 1:1.
In late September, the price of Humana Inc. (HUM) stock dipped below channel support and then consolidated for six sessions. A series of up days followed, which broke the consolidation and indicated that there was still support in the area. As of Oct. 10, the price is still near the buy zone between $245 and $240. (For more, see: Humana Shares Gain as 2018 Medicare Advantage Outlook Improves.)
Traders could place a stop-loss below $235, but it may be wiser to give the stock some room to move, as it is possible that the price could clear out stop orders below $235 before heading higher. The upside target is $265 at the top of the channel. Entering near $245 provides a 2:1 reward-to-risk ratio, while entering near $240 provides a far superior 5:1 reward-to-risk ratio.
The Bottom Line
Aflac stock has rallied off channel support and is heading toward the target at the top of the channel. An entry is still possible if the price pulls back to the entry area prior to hitting the target. Meanwhile, Humana stock is currently in the entry area. If the price heads higher off support, the setup provides for a high reward-to-risk trade.
Market players should trade trend channels while they last, and the price action on these stocks is providing valid entry signals. Traders should utilize a stop-loss to help control risk and remember to risk only a small portion of account capital on any single trade. (For additional reading, check out: The Daily Routine of a Swing Trader.)
Charts courtesy of StockCharts.com. Disclosure: The author has no positions in the aforementioned securities at the time of publication.