Classic Technical “Set Ups” – Part II

Yesterday, we shared a classic technical analysis "setup" that we pulled from a report recently issued by technical analyst Frank Cappelleri and his excellent service, CappThesis.

As a reminder – we found Frank through another excellent newsletter called The Chart Report. You can follow them on X/Twitter here and subscribe to their free daily newsletter here.

You can also follow Frank and CappThesis on X/Twitter here and subscribe to his newsletter here.

The setup we discussed yesterday was a "Bullish Pattern Breakout – Uptrend.”

This is where you have a stock in a well-established upward trend and about to break out.

An "uptrend" means a rising stock price over the previous few years. Think of a chart pattern going up and to the right.

This pattern looks for a period of consolidation in those stocks and waits for them to "break out" to new highs. At that point, you buy the stock.

The stock we discussed in that issue was Berkshire Hathaway Inc. (NYSE: BRK.B), and you can read that note here.

We also added our own “quantamental” analysis to Frank’s idea. “Quantamental” is combining quantitative or technical analysis with fundamental analysis.

We look for momentum in the operating fundamentals of the stock to back up the technical analysis.

In today's HX Daily issue, we will look at a related but – in some ways – utterly opposite pattern.

Here it is…

2) BULLISH PATTERN BREAKOUT – DOWNTREND

The stock Frank identified is drug giant Pfizer Inc. (NYSE: PFE). Here is what he wrote…

“PFE – While we typically look for stocks trading above an upward-sloping 200-day moving average when screening for buy ideas, sometimes it's worth profiling turnaround candidates sporting potential bullish patterns. PFE had a strong snap back from late April, and yesterday, it re-triggered a double bottom formation. Continued upside would target the 32 zone initially.”

Here is the chart…

We think this is an interesting idea.

First, let us share our opinion on stocks in confirmed downtrends like PFE. An opinion that we know Frank shares.

AVOID THEM.

Generally, buying stocks whose charts are "up-and-to-right" is a much better strategy than "down-and-to-the-right."

There are exceptions. This PFE trade might be one of those.

Frank points out in his note that PFE stock is now consolidating. It has tested and re-tested these price levels twice after being in a consistent downtrend for over a year.

IF the stock can break out from these levels, then it could have a lot of room for the upside.

Frank's strategy would advise you to BUY this stock once it breaks out of the current situation. Let’s say above the $30 level.

Given our views on buying stocks in a downtrend (again – AVOID), we have a high bar to be willing to get involved, but PFE might be one to watch.

This is where our “quantamental” perspective begins to play a role.

Here is the stock chart for PFE from the last five years…

You can see that the stock has been a wild ride! Going from its current level (roughly $28) at the COVID low and then more than doubling into early 2022.

What happened? The COVID-19 vaccines!

PFE was the leader in COVID-19 vaccines, and as the roll-out happened in late 2020 and 2021, they saw exploding earnings. Here is the table showing their EPS across the last few years…

EPS rocketed higher with the vaccine roll-out and almost tripled in two years. After that, though, they collapsed as demand for the COVID-19 vaccines also collapsed.

This led to some vicious downward earnings revisions. Here is the chart showing the 2024 EPS analyst estimates and the stock price.

The blue line is the estimate for 2024 EPS, and the white line is the stock price.

After peaking at $4.75 per share in late 2021, they have decreased consistently until they bottomed back in 2021.

Those familiar with your work at HX Research know this is the most potent correlation we see with stock prices. They follow earnings revisions.

You can see this correlation starkly in the chart above.

You will also notice that recently, the negative earnings revisions seem to have bottomed out.

In late December, analysts brought down estimates in a big way – going from $3.20 to $2.30. When this happened, the stock rallied!

Nine times of ten, we would NOT get involved with a stock in a confirmed downtrend like PFE. PFE, however, might be the exception.

Let's return to the recent price chart but include volume this time…

Look at the vast volume traded back in late December. Also, look at the persistent high volumes as the stock has consolidated recently.

It is also perhaps no coincidence that the stock is consolidating around its trading levels at the COVID lows.

Our view is that if EPS revisions can stop going down and – maybe – go up, the stock has a lot of upside!

Right now, the stock trades at around 12x EPS – which is cheap historically and relative to their global peer group. It also has a 6% dividend yield and a strong balance sheet.

This balance sheet is one of the reasons we are more open to buying a stock in this type of downtrend.

If this were a small-cap or a company with a bad balance sheet, we wouldn't consider considering the idea.

PFE is the opposite.

We like Frank's approach: wait for the stock to confirm that a "bottom" is in and then take a shot at it moving higher.

Tomorrow, we will finish our review of these classic technical setups with one directly out of the HX Research playbook!