These stocks have been trending higher, and a recent pullback to trendline support presents a potential swing trading opportunity. Over the last year, when the price has pulled back to trendline support in these stocks, the stock has proceeded to rally. Unfortunately, there is no assurance a trendline will continue to support the price now, or in the future. Therefore, before taking a trade the risk/reward of the trade should be analyzed, based the stop loss and target price.
Canadian National Railway Company (CNI) bottomed at $46.23 in early 2016 and has been moving to the upside since. The current trendline extends all the way back to the low, and as of Feb. 28, the price is once again trading near that trendline at $70. Trendlines provide an area to watch for opportunities but aren't a trade signal in and of themselves. Before taking a trade, the price should pause and then bounce higher off the trendline area, showing that support has held once again. For CNI, with support in the $70 region, a rally above the three-day high of $71.30 would signal a buying opportunity. By waiting for the price to move up before buying if the price keeps dropping (trendline does not provide support) a losing trade is avoided. A stop loss is placed below the most recent swing low. That low may change, but currently, the stop loss would be placed below the Feb. 28 low of $69.73 (if the price rallies above $71.30 to trigger the trade). That creates a risk of about $1.60 per share.
Upside in the stock has been capped by the top of a wedge formation that extends back to July. Every rally during that time has hit the top of the wedge and then move lower. Just below the top of the wedge, currently at $73, is a good spot to consider taking profits. Looking at the reward relative to risk, it is very close to 1:1. A trader is potentially making a $1.70 and risking about the same. That isn't horrible, but it isn't ideal. Many traders only take trades where the reward outweighs the risk by 2:1 or more. Wedges are also often "ending" patterns, meaning this rally may be nearing exhaustion and due for a sizable drop. A buy signal could be in the making here but tread carefully.
Micron Technology, Inc. (MU) has been rallying higher since mid-2016, clawing back losses from a major decline in 2015. The trendline extending back to May indicates support should kick in near $22. Since December, though, the uptrend has accelerated, with a short-term support between $23 and $22.50. That short-term support area is where the price has traded for the last half of February. Consider a purchase near $23, with a stop loss below $22.64. This equates to a risk of a bit more than $0.36 per share. The upside price target is $25.50 to $26 (top of trend channel). Therefore, trade presents $2.50 to $3 of upside for the risk. The drawback here is that the longer-term trendline indicates the price could continue to drop toward $22. While that would stop out the trade above, the $22 region presents another potential trading opportunity.
On the chart of Six Flags Entertainment Corp. (SIX), notice the price rally since September. A trendline was formed early in the trend, and late-February was the first time the price has pulled back to that potential $59 support area. The price jostled around that level as earnings were released on Feb. 22, showing that the area was still acting as support. Since then the price has rallied, closing at $60.61 on Feb. 28. Getting in near $59 now would require a pullback, at which point a stop loss could be placed below $57.90. If an entry can be secured near $59, the risk per share is a bit more than $1.10. The upside is about $4.50 to $5 with a target of $63.50 to $64, as that is the top of the short-term channel.
On a bearish note, a much longer-term channel in Six Flags, going back to 2014, indicates the price is near long-term resistance. This means the price could be nearing a top and due for a sizable correction into long-term trendline support between $50 and $52.
The Bottom Line
Any single trade may or may not work out. That is why successful traders often attempt only to take trades where they can reasonably make more than they will lose. That way, over many trades, if winners are bigger than losers the trader is more likely to end up with a profit. There is always a risk in trading. For example, while the risk/reward in Micron Technologies or Six Flags looks good, there is also a good chance of a deeper pullback that would result in a losing trade.
Disclosure: The author doesn't have positions in the stocks mentioned.