10 years ago, I traded the stock market much differently. I didn't maintain a "Strong Earnings ChartList" to trade exclusively from like I do now. I considered relative strength, but it wasn't a primary focus. But I look at the overall stock market and individual trades through another pair of glasses now. There are thousands of stocks to consider, so why shouldn't we be picky.
This brings me to Texas Instruments (TXN), which I featured this morning in my free EarningsBeats.com Digest newsletter. If I was simply looking at yesterday's reversal off key support, I'd be interested. Here's the chart:
I'll be honest, I love that reversal at price support so I wouldn't necessarily be opposed to trading it. But given its awful relative strength vs. its peer semiconductor group ($DJUSSC), I'd keep a very tight stop. The recent failure at the declining 20 day EMA is significant because this suggests we have a downtrending stock whose next trip to the 20 day EMA will likely fail as well. Currently, that 20 day EMA is at 119.20, which limits our upside to 3.10.....and that 20 day EMA will continue to fall every day. I'd be concerned if yesterday's low of 114.59 was violated, so if we used an INTRADAY stop of 114.58, we'd have 1.52 of potential downside. Thus, currently the reward (3.10) vs. risk (1.52) ratio is slightly above 2. We also know that 20 day EMA will drop again today. Therefore, our reward to risk is likely to drop below 2 to 1.
10 years ago, I might have bought TXN here. I'm much more selective now and, based upon that fairly low reward to risk ratio, I'll pass. It's not on my Strong Earnings ChartList because TXN was unable to beat Wall Street consensus estimates, so it's all a moot point anyhow.
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