If you've watched CNBC for any lengthy period of time, you've probably seen a commercial for "Channeling Stocks" (or something similar-sounding) that promotes the trading of predictable, range-bound stocks.
I do not subscribe to or endorse such a service, but I've been successfully trading a "channel" stock myself - Abercrombie and Fitch (ANF).
Below is a chart of the last year and a half of trading; it's blatantly clear that Abercrombie is now range-bound.For a year and a half, ANF has bounced between about $72 and $82. Starting with the dip in December 2006, there have been five rise-and-falls.
I love ANF's long-term prospects (and do plan to own them for the long run), but with a stock like this, buying and holding through the rise and falls is poor management of one's portfolio. If you bought in at $67 in Dec '06 and held until now, you would have made 20% - congratulations. However, if you would have bought each time it came close to the 30 line on the RSI (top indicator) and sold every time it got close to the top, you would have executed 5 trades that each would have generated more than 10% of gain. Lets run some math quickly:
Say you're investing $1000. In 2006 you could have purchased 15 shares, which you could have sold Friday for $1200. However, if you traded more often....
- Buy 15 shares in 12-06, sell in 02-07 when it crossed the 70line on the RSI. 15 shares sold at 80 then = $1200.
- Buy in around $72 in March when it touches the oversold barrier, and get 16 shares (with $50 left over). Sell in late April when it touches the overbought barrier around $80 (conservative price) and net $1280, plus the $50 on the sidelines.
- Buy back in late June around $72, buying 18 shares (and having about $30 left over). Here, you could have stocked up more later (now seeing how this strategy works) at an even lower price later. Once again, even if you conservatively sold at $80 (not at $82 or $85, which the stock did hit), you'd net $1440, with $1470 total in the fictional account now.
- Buy again at $72 in November, getting 20 shares and having $30 left over. Sell again at $80, a month later, and bring in $1600.
- The latest buying opportunity was the start of this year, when it was below 70 as it touched the oversold line. With the $1630, 23 shares could have been bought. Though it's still not oversold, if you sold at $80 on Friday, you would have cashed out with $1840.
If you had bought and sold, you would have ended up with an 80+% return. Buying and holding produced a laughable 20% gain. (Sarcasm - but the point is, look how much better you could have done.)
All of my entry and exit points in the example above were a few dollars too conservative, because it is unrealistic to expect one to buy and sell at the absolute lows and peaks. (If you're using a discount broker like TradeKing, commissions are only $5 each way and pretty much neglitable, as long as you're trading at least $500 of stock each time [and I took that into account when I rounded with each example trade]). But I have successfully executed this trade three times now, because it has been so predictable. One can confidently use the $72/$82 range, or simply trade with the RSI. Each time I've done this trade, I've sold the position with a stop-limit that I place at $78 when the stock goes above $80, $80 when the stock goes to $82, and $82 when the stock is above $83. It hasn't failed yet.
But I do only close the positions through stop-limit because I expect ANF to break out of the upward limit of the range one day. Abercrombie is a sold company, and the stock was especially resilient when most retailers (and most stocks) were crumbling over the past six months. Abercrombie is expected to continue to grow at 15% over the next 5 years, and it's only trading at 14 times next year's earnings (both stats according to Yahoo! Finance).
I'm not sure that now is the time that ANF will make it to $90 or $100 (because of recessionary fears, consumer constraints, and generally-bad sentiment), but who knows. Maybe consumers will decide to go buy a $50 polo shirt with their rebate checks. Also, lots of market cheerleaders (most notably, recently, Jim Cramer) have been going gaga for retailers as they have rallied recently. The stock is now at $82 and barely above 50 on the RSI, so based on momentum, it doesn't look like it will pull back yet. I'd like to see the price moderate a little in the next week, so it can make a push past $85 without bursting through the overbought barrier.
The moral of the story? With a good company like Abercrombie, buying and holding will create good returns, but buying and selling at predictable points can generate exceptional gains.
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