Like many stocks, shares of
, a large-cap company that has footprints in several broad sectors including aerospace, automation and control systems, specialty materials and transportation systems, enjoyed a nice run off the March lows. However, it appears to have fumbled with its updated earnings outlook released earlier this month.
The outlook resulted in a larger-volume spate of selling that took the stock lower. There are no real problems on this long-term time frame other than the huge supply line that Honeywell is struggling with in the $40 to $41 price range. The first level of good support is in the $33 to $34 area.
It's on the intermediate- and short-term time frames that the problems become evident.
On the intermediate-term time frame, although the trend remains bullish, it is
Since the May time frame, none of the breaks higher have confirmed. Since then, HON has been working higher on a suspect basis. In such a case, the trend can continue higher, but the red warning flag has been raised. It is when additional warning bells are rung that you should seriously consider how the stock fits into your portfolio.
If we switch to the daily chart, we can see the additional warning bells ringing now.
On this short-term time frame, we can see that the suspect bullish trend has now changed to sideways confirmed. What this means is that the change in trend is confirmed, or it has happened, on this time frame. That should tell current owners of HON to either consider tightening up their stops, writing some covered calls, or even selling off a portion of their holdings while they move into wait-and-see mode.
More aggressive traders could consider shorting the stock. It is currently providing a very nice shorting opportunity.
The high volume decline under the swing point on a gap down is always a nice backstop to short into. The short can be put on at the current price point with a stop up around the $41.33 price range and a target of roughly $34 to $35. That provides a 3-to-1 reward-to-risk ratio. The dividend payout is another 45 days out. The short interest is a meager 1% or so of float.
In other words, there are no major drawbacks to putting a short position on at these prices. If you remain long in other issues this is one way to hedge your portfolio with a nice insurance short that should pay out before the trade is done.
So until next time, keep trading the charts!
At the time of publication, Little had no position in Honeywell. However, shortly after this story was published, Little took a short position in Honeywell.
L.A. Little is an author, professional trader and money manager who writes daily on
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