Good morning everyone! From now on, every Thursday morning we will be highlighting our favorite trade setup of the week. This week, we will be taking a look at a short setup in A.
Agilent Technologies makes lab equipment for life sciences and chemical companies, which is a stable and growing market. The company does a lot in revenue - roughly 6 Billion over the last twelve months - and it makes solid net income margins in the mid teens. Growth is slow but stable. Over the last twelve months, demand for the company's products increased as a result of the COVID pandemic, and resulting demand bump for biotech equipment. Because of this, the company saw it's highest period of growth in the last decade with a 17% bump in revenue. The company is well run, and that top line growth will drop straight to the bottom line in the form of increased earnings.
As a result of this business catalyst, and the bump in performance, the stock, since COVID lows, has rallied nearly 200% to it's current price around $173 per share.
We are looking to short this move.
This is because the stock, on a multiple basis, has re-rated as though it will experience a higher level of growth for the long term. The valuation is incredibly stretched at a 50x FWD P/E, which constitutes a nearly 35% increase to A's long term average multiple. Given that the company will, operationally, likely mean revert to a lower rate of long term growth, this multiple expansion basically constitutes "peak sentiment", in our view. Not to mention that the stock is also one of the most technically overbought names in the entire market, at a 89 RSI and 60 ADX.
"The trend is your friend till the end". We believe that the end is near, and the stock is a short.
Shorting here seems dangerous. It's an overbought euphoric zone but the RSI did not cross back under the 70 level, meaning it's still bullish especially when there is not any potential normal bear divergence!
The parabolic structure can go higher imho
wargolynch
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It recently broke its past all time high, meaning this stock is in price discovery without any confirmed bearish signal on the daily and weekly charts!
timbousc1
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@GreenValleyTrading, This^^. Sure the candles look extended on the daily & weekly, but shorting against an upward trend while the price dances above the 8 & 21 ema is especially dangerous when the trend is supported by EPS growth & solid margin.
There are companies out there with equally extended price, below their emas, with far worse financials to look for short moves.
This is all a game of probability, and there are factors working against this play.....good luck.
PropNotes
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@timbousc1, I'm not saying that it's the same situation, but people had the exact same response to us when we published the following trade on Moderna and Viacom.
Sure, there is trend and strength, but if you're looking to add a short to your portfolio in a rich market you could do a lot worse than this A right now.
wargolynch
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@DiscordiaResearch,
wtf well done!
Still, these were better short configurations imho, with a multiple normal bear div on the daily for Viacom and a beautiful normal bear div on the 4h for Moderna!
Here with A, we don't have any obvious signal even on the 4h chart. It could still gain +14% before reaching the yearly R3 pivot resistance.
nsj5cw
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Love this idea. After months of trying different strategies and honestly getting way to into tech analysis, I'm finding that the best plays are the simple combination of qualitative and quantitative analysis that clearly point to one direction, and this clearly points to a pullback. Great pick and excited to see how this ends up going.
PropNotes
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@nsj5cw, that's always how technical analysis goes. Starting by trying to perfect a system but then realizing it's impossible to not take losses & one basically has to learn the other side of the business to REALLY make some $$. This isn't the highest conviction play out there for us either, just something we think has some edge.
DiegoGarcia_TradingSimple
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the trend is your friend and the market could be crazy much time more.