Although we are in the midst of a trending bull market, it always pays to keep your watch list up to date with stocks that may be undergoing a change in character. There is nothing wrong with mixing in an occasional short trade, even in a bull market if the set up is good and the risk/reward ratio is favorable and the Waste Management Sector may be an area where we can find some stocks that may be ready to stink up the joint. The stocks have been churning out slow but steady growth but valuations are fairly high and recent technical action may be showing the stocks are ready for a decent pullback, so lets take a look.
SECTOR- A look at the sector shows a nice trend over the last 3 1/2 years that started with a breakout in early 2014. After a quick pullback in late 2016 the sector gained some nice momentum, but some recent weakness in some of the bigger names resulted in a bearish wide range outside week that may be signaling the start of a correction.
WM- Waste Management shares have trended nicely since 2013 adding over 125% during that time. The stock has garnered nice support on three occasions along an uptrend line since October of 2016, most recently on 10/4 after the stock gapped down hard losing nearly 4%. The stock has rebounded over the last several sessions giving interested shorts an opportunity to enter a position with a tight stop near $79.00. Should the trend line break, the stock could see some support at the 200 day MA which currently sits near $73.50, but an accelerated sell-off could see the stock drop to around $70.00 netting gains of around 10% based on the Fridays close, which sets up a nice risk to reward ratio on the trade.
RSG- Republic Services also sets up a nice risk/reward scenario. The stock is in a process of printing a bearish moving average crossover that can coincide with a change in trend. The stock sold off sharply with other stocks in the group on 10/4, but hasn’t been able to mount much of a bounce since. This could possibly set off a momentum short trade should the stock break hard below the 200 day MA which currently sits near $62.75. That scenario could see the stock trade down to the next the next level of support near $58.00 which would net gains of around 8% based on Fridays close. A stop could be placed just above the high of the 10/4 sell-off bar near $65.50 limiting losses to around 4%.
SUMMARY- Although these set ups don’t seem to initially offer extremely large returns, the risk to reward ratios are high. Additionally, if industry trends take a sharp turn downward or the general market corrects, these set ups may reap bigger rewards. Others in the group worth watching are CWST, DAR and WCN.
-CJ AGRESTA, Trust The Process Trading