Gun maker Smith & Wesson Brands, Inc. (SWBI) is consolidating a huge gain from its March 12 low of $4.24 to its Sep. 2 high of $22.40. Since this high, shares are down 27.7% to a close of $16.19 on Tuesday, Sept. 23.

Key Takeaways

  • Smith & Wesson has been making firearms, ammunition, and restraints since 1856.
  • Shares of the gun maker have been extremely volatile.
  • The stock is consolidating a huge gain from its March 12 low of $4.24 to its Sep. 2 high of $22.40.

This stock has been extremely volatile. It's up 127.1% year to date and up 281.8% from its March 12 low of $4.24. It's also 27.7% below its Sept. 2 high of $22.40. The company has been making firearms, ammunition, and restraints since 1856. Today, Smith & Wesson concentrates on pistols, revolvers, and rifles.

The daily chart for Smith & Wesson

Daily chart showing the share price performance of Smith & Wesson Brands, Inc. (SWBI)
Refinitiv XENITH

The daily chart for Smith & Wesson shows that the stock has been above a golden cross since Jan. 2. This occurred when the 50-day simple moving average rose above the 200-day simple moving average to signal that higher prices would follow.

The golden cross is a candlestick pattern that is a bullish signal in which a relatively short-term moving average crosses above a long-term moving average. As long-term indicators carry more weight, the golden cross indicates a bull market on the horizon and is reinforced by high trading volumes.

Following the low of $4.24 on March 12, the stock reached its annual risky level (now a pivot) at $16.91 on July 1. The annual pivot and this month's pivot at $17.10 were magnets between Sept. 4 and Sept. 15. The stock is now below these key levels.

The weekly chart for Smith & Wesson

Weekly chart showing the share price performance of Smith & Wesson Brands, Inc. (SWBI)
Refinitiv XENITH

The weekly chart for Smith & Wesson is negative, with the stock below its five-week modified moving average of $16.67. The stock is well above its 200-week simple moving average, or reversion to the mean, at $10.54. The 12 x 3 x 3 weekly slow stochastic reading is projected to end this week declining to 44.63, down from 56.80 on Sept. 18.

Trading Strategy: Buy Smith & Wesson stock on weakness to its quarterly value level at $10.08, and reduce holdings on strength to its annual and monthly risky levels at $16.91 and $17.10.

How to use my value levels and risky levels: The stock's closing price on Dec. 31, 2019, was an input to my proprietary analytics. Semiannual and annual levels remain on the charts. Each calculation uses the last nine closes in these time horizons.

The third quarter 2020 level was established based upon the June 30 close, and the monthly level for September was established based upon the Aug. 31 close. New weekly levels are calculated after the end of each week, while new quarterly levels occur at the end of each quarter. Semiannual levels are updated at mid-year, and annual levels are in play all year long.

My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in. To capture share price volatility, investors should buy shares on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before their time horizon expires.

How to use 12 x 3 x 3 weekly slow stochastic readings: My choice of using 12 x 3 x 3 weekly slow stochastic readings was based upon backtesting many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.

The stochastic reading covers the last 12 weeks of highs, lows, and closes for the stock. There is a raw calculation of the differences between the highest high and the lowest low versus the closes. These levels are modified to a fast reading and a slow reading, and I found that the slow reading worked the best.

The stochastic reading scales between 00.00 and 100.00, with readings above 80.00 considered overbought and readings below 20.00 considered oversold. A reading above 90.00 is considered an "inflating parabolic bubble" formation, which is typically followed by a decline of 10% to 20% over the next three to five months. A reading below 10.00 is considered "too cheap to ignore," which is typically followed by gains of 10% to 20% over the next three to five months.

Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.