These three stocks all had big rallies into 2017 but then stalled. When a big rally is followed by a consolidation, it is worth paying attention to. The consolidation doesn't necessarily mean the big moves are finished. Just like we need a break after a long jog, stocks also take breaks after a lot of movement. Buyers and sellers weigh their options, take profits and losses, and volume often declines during this period. Eventually, though, the consolidation breaks and traders pile back in, helping to fuel another large price move. Ideally, this should happen on increased initial volume to indicate that a lot of people are interested in getting in on the action.
Sprint, Corp. (S) has been moving in a descending triangle pattern since late January, following a more than 280% rally off the 2016 low of $2.18. The trend is up, which favors an upside breakout and longs are the primary focus, but a downside breakout could also occur. The low of the triangle is $8.13, and stop losses on long positions are placed below that. The high of the pattern is $9.65. Deducted from the low, that gives a pattern height of $1.52. A breakout occurs at $8.60, but a more reliable signal is waiting for a rally above $8.75 (short-term resistance). The height of the triangle added to the breakout price gives an estimated target of $10.12. Given the prior strong momentum, a trailing stop loss could also be used to maximize gains if a big run does occur.
Energy Transfer Equity, L.P. (ETE) has stalled out since September, but this stock is no stranger to big moves. In 2016 it went from a low of $4 to a high of $20.05. Traders will be watching for a breakout above $20.05, preferably a closing price. If that occurs, a stop loss can be placed below $18 (short-term support). Since the sock has been moving sideways for more than seven months, when a breakout occurs it could be sizable. A conservative target is $24, with a more aggressive target at $26. A trailing stop loss could also be used. The stock is moving sideways currently, so if it starts dropping below $18 and $17.50 that could signal it is headed toward longer-term support at $14.
Ocwen Financial Corp. (OCN) traded as low as $1.29 in July and rallied as high as $6.15 in December. Since that high, the price is moving in a descending channel. This gives traders a couple of options. One option is to buy near the bottom of the channel, which is currently near the $4 mark. Alternatively, wait for a strong breakout above the channel. Closes above $5.80 and $6 would signal the breakout has occurred but should be accompanied by rising volume. Buying near $4 presents the lowest risk option, as a stop loss can be placed not far below. Since the channel is quite large, if a trader opts to wait for the upside breakout then a stop loss could be placed within the channel, near $5.10 for example.
The Bottom Line
These stocks have moved into consolidation patterns following strong rallies. Ocwen is still moving aggressively, while Sprint and Energy Transfer Equity have seen a substantial decrease in price movement. All three still likely have more big moves to come, though, once they break out of these current patterns. Utilize a stop loss to control risk and a trailing stop loss or profit target to take profits. Losing trades happen, so keep risk on any single trade to a small percentage of account capital.
Disclosure: The author doesn't have positions in the stocks mentioned.