TXT Stock: Awaiting Confirmation
Textron Inc. (NYSE:TXT) first piqued my interest in May 2017, when rumors starting swirling that a buyout was in the works. Aside from the initial pop in TXT stock that was a result of the buyout rumors, the trading action has been dull and uneventful.
Ever since that fateful day, I have been watching the trading action in Textron stock because, if the rumors are indeed factual, a substantial move to the upside can be expected.
To be honest, even if there were no rumors surrounding Textron, I would still be quite excited about the prospects of this investment because the price action has been setting up to make a move long before the rumors of a buyout began to swirl around this name.
The following Textron stock chart illustrated the price action which is suggesting that a move is in the making.
Chart courtesy of StockCharts.com
This TXT stock chart illustrates that a move has been in development since the stock price accelerated away from the 200-day moving average in October 2016. For anyone not familiar with the 200-day moving average, this key metric is used to distinguish whether an investment is in a bullish state versus a bearish one. Using this metric is quite easy because this moving average acts as a dividing line: trading above the 200-day moving average is bullish, and trading below it is bearish.
Textron shares have consistently traded above this metric, so the inclination to carry a bullish view is already apparent. After the 200-day moving average was tested in October 2016, the stock price accelerated higher via an impulse wave. An impulse wave is one of two waves that make up constructive price action. The fact that constructive price action is occurring above the 200-day moving average adds credence the idea that the next move is setting up for an advance.
Constructive price action consists of two waves that alternate. The first wave, an impulse wave, defines the progression in the stock price as it swiftly stages an advance. The second wave, a consolidation wave, defines a countertrend move that alleviates overbought conditions that were created during the previous impulse wave, and—more importantly—sets up the next advance that will also be labeled an impulse wave. This wave structure is essential in creating a sustainable trend toward higher stock prices.
After the impulse wave concluded in January 2017, a consolidation wave followed. This wave is still in development, but the standout factor is that the 200-day moving average was just tested in June 2017. It acted as a level of price support, and investors were keen to jump in and support this metric. The last time this metric was tested (October 2016), an impulse wave quickly developed in which TXT stock ran to the upside, tacking on 37% in a matter of a 2.5 months.
Something similar can now develop. In order to confirm that a new impulse wave is in development, Textron needs to complete the consolidation wave that is currently in development.
The following Textron stock chart illustrates an indication that has been instrumental in confirming which wave is in development.
Chart courtesy of StockCharts.com
This TXT stock chart is used to illustrate how effective the moving average convergence/divergence (MACD) indicator—in the lower panel—has been in confirming which constructive wave is in development.
For those not familiar with this indicator, MACD is a trend-following indicator that is used to distinguish between bullish and bearish momentum, using the crossing of a signal line.
In late October 2016, a bullish MACD cross was generated, indicating that bullish momentum was influencing the TXT stock price, and that, therefore, the stock price was geared toward higher prices. This indicator was instrumental in suggesting that an impulse wave was set to develop, so the rally that followed was no surprise.
In February 2017, a bearish cross was generated, indicating that bearish momentum had overwhelmed Textron stock, and that consolidation was in development. This indication is still in bearish alignment, and, as result, the stock price has refrained from staging an advance.
The MACD indicator is approaching the zero line, and the signal lines are beginning to converge. A bullish signal will suggest that the consolation wave is complete, and that a new impulse wave is in development, implying that higher stock prices are on the horizon.
Bottom Line on Textron
Textron stock is setting up to make a move, and I am watching key indications that are instrumental in suggesting when and in which direction this move is set to take place. My bias is tilted toward the bullish camp because the key developments I am watching are occurring above the 200-day moving average. This implies that the next move in TXT stock will be to the upside.