From the desk of Tom Bruni @BruniCharting
Earlier today we uploaded a post outlining the case for some mean reversion in Canadian Equities, as well as the stocks we’re buying to take advantage of that thesis. The same pattern that can potentially drive those stocks higher is also present in the IBD 50 ETF FFTY, so in this post we’re outlining the IBD 50 stocks with the best reward/risk.
First let’s take a look at the ETF itself, which has fallen 35% since October and recently undercut support as momentum diverged. If prices are above 26.75, this failed breakdown and bullish momentum divergence setup remains intact, targeting former support near 32.
Click on chart to enlarge view.
While it’s clear that a mean reversion opportunity is present at the index level, we know that individual stocks often offer more upside potential than trading the index itself. As a result, we’re going to outline the IBD 50 names best suited to take advantage of this thesis.
Atlassian Corp. is a Software stock that’s held up well during this market pullback. It did get oversold during the correction, but is back above support at 84.15, so we can be long against that level and targeting 121.50. We want to see upside follow-through in the days ahead with momentum getting back into overbought conditions.
Five Below briefly broke back below support and quickly reversed higher, with momentum maintaining its bullish range. This could be the catalyst needed for the stock to continue its uptrend higher, so we want to be long against 95.50 to give this room to work. If you want to use a more aggressive stop, you can be long against 101.40, but should expect some whipsaws on its way to our target of 147.50.
It’s make or break time for Fortinet, which is clinging to support as momentum diverges positively. If prices can get back above 71.75, that would confirm a breakout that targets the former highs near 94.25.
Five9 Inc. is another Software name that’s held up well and looks to be setting up for an upside breakout on the weekly chart. If prices are above 44.20, we can be long with an upside target near 69.40.