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3 Trades to Profit From This Selloff

Stocks in this article: BHP LUX LMT

Luxottica

While luxury good have been one of the biggest beneficiaries of the recent upticks in consumer spending, that also means that they stand to suffer the most in the face of another economic contraction. For that reason, it's no surprise that investors tend to be more anxious about stocks such as Luxottica Group (LUX), the Milan-based purveyor of sunglasses and high-end prescription eyewear frames. Now, though, a technical setup stands to shake out some bulls.

Shares of Luxottica have been trading in a narrowing, uptrending channel, a setup known as a rising wedge in technical parlance. Despite this pattern's somewhat bullish appearance (it's in an uptrend, after all), this is actually a bearish setup that suggests a downside breakout is in store.

The statistics bear out just how consequential this setup actually is. Backtesting shows that this pattern leads to downside breaks approximately 90% of the time.

To trade the bearish signal, however, it's crucial to wait for the break below the lower trend line. Wedges can continue to rise for some time, so to ensure the highest low-risk price at entry, shares need to actually make a confirmed break below the wedge. When shares do eventually fail, consider a stop loss around the 50-day moving average.

Luxottica showed up on a recent list of the top-yielding specialty retail stocks.

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