This weekend, we uploaded a post outlining the case for some mean reversion in Canadian equities as well as the stocks we're buying to take advantage of that thesis. The same pattern that can potentially drive those stocks higher is also present in the Innovator IBD 50 ETF (FFTY), so in this post, we're outlining the IBD 50 stocks with the best reward/risk.
First, let's take a look at the ETF itself, which has fallen 35% since October and recently undercut support as momentum diverged. If prices are above $26.75, this failed breakdown and bullish momentum divergence setup remains intact, targeting former support near $32.
While it's clear that a mean reversion opportunity is present at the index level, we know that individual stocks often offer more upside potential than trading the index itself. As a result, we're going to outline the IBD 50 names best suited to take advantage of this thesis.
Atlassian Corporation Plc (TEAM) is a software stock that's held up well during this market pullback. It did get oversold during the correction but is currently back above support at $84.15, so we can be long against that level and targeting $121.50. We want to see upside follow-through in the days ahead with momentum getting back into overbought conditions.
[To learn more about mean reversion and other tools that can help you anticipate the direction in which stock prices are likely to move, check out my Technical Analysis course on the Investopedia Academy.]
Five Below, Inc. (FIVE) briefly broke back below support and quickly reversed higher, with momentum maintaining its bullish range. This could be the catalyst needed for the stock to continue its uptrend higher, so we want to be long against $95.50 to give this room to work. If you want to use a more aggressive stop, you can be long against $101.40 but should expect some whipsaws on the way to our target of $147.50.
It's make or break time for Fortinet, Inc. (FTNT), which is clinging to support as momentum diverges positively. If prices can get back above $71.75, that would confirm a breakout that targets the former highs near $94.25.
Five9, Inc. (FIVN) is another software name that has held up well and looks to be setting up for an upside breakout on the weekly chart. If prices are above $44.20, we can be long with an upside target near $69.40.
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Thanks for reading, and let us know if you have any questions!