Systematic Trading with ATI stock
Once a week I run a stock scanner that looks for investments that match a certain criteria. That is how I stumbled upon Allegheny Technologies Incorporated (NYSE:ATI) stock.
From the start, I was intrigued by my findings. The price chart looks compelling and I feel like ATI stock may be a good candidate to consider executing a trading strategy on.
I am a proponent of a system in which rules are set and adhered to. I find the best systems are simple, easy to execute, and have an exit strategy. In this case, I don’t even know what the company does, but that isn’t important. My system doesn’t require that information to be successful. Everything I use to formulate a trading strategy is found in a company’s price chart.
The following is the price chart of ATI stock:
Chart courtesy of www.StockCharts.com
This pick offers an example of how to use moving averages to spot signals. The above chart contains a death cross and a golden cross. The averted golden cross in the middle of the chart is an example of a failed signal.
To take a quick step back, know that a golden cross signals a bull market is on the horizon and a death cross indicates a bear market is on the horizon. The signal is confirmed when the faster moving average (in this case, the 50-day moving average) moves above or below the slower moving average (here, it’s the 200-day moving average). The golden cross and death cross are exact opposites.
I like ATI stock’s chart as an example because a moving average cross is not a justifiable trading signal on its own. If you used it for ATI stock, you would have purchased it in June 2015 and sold it in July 2015 for a significant loss. This indicator is best used when it is confirmed by a chart pattern.
The following chart outline the current pattern emerging on the price chart of ATI stock:
Chart courtesy of www.StockCharts.com
The pattern in the price chart of ATI stock is a cup-and-handle formation. The cup-and-handle formation is a bullish pattern. The name loosely describes the shape it forms on the stock’s chart, with the deeper dip being the cup and the smaller dip resembling a handle. I like patterns like this one because they provide a price objective that could be used to formulate a stronger strategy.
The projected price objective of this pattern is the depth of the cup projected above the horizontal resistance. Based on these criteria, we get a $29.00 price target for Allegheny Technologies stock. This is confirmed when the share price closes above the horizontal resistance level at $18.00. Once the stock breaks above the horizontal resistance line, its share prices shouldn’t trade back below it.
The confirmation of both signals is enough to formulate a strategy.
The Strategy for a Pick Like ATI Stock
Instead of buying ATI shares outright, investors may want to consider using options to capture the possible gains and keep the initial outlay to a minimum.
Using a bull call spread would effectively capture our strategic objective. This strategy involves simultaneously buying calls at one price and selling an equal amount of calls at a higher price. The only risk an investor faces with this strategy is the initial outlay used to put the trade on. For example, you could buy one January 20, 2017 $20.00 call contract for $1.80, then sell one January 20, 2017 $25.00 call for $0.35.
Using this strategy, your net outlay is $1.45 per share. At expiration, if shares are trading above $25.00, the net value of the trade will be $5.00, giving you a profit potential of 244.8% (excluding applicable fees).
The Bottom Line on ATI Stock
ATI stock is a perfect example in which a system using multiple signals and rules can be used to formulate a quality trading strategy. With any strategy, managing risk is always the No. 1 objective. In this example, the risk is $1.45 per share; a complete loss of $1.45 is the worst-case scenario, making ATI stock a good example of an attractive potential trade.
Note that with every potential trade, due diligence is key. The strategy outlined above is meant to be an example of the kind of process you can perform when formulating your own trading strategy on a potential investment and should not be considered a specific investing recommendation for ATI stock.