Investors can be rewarded handsomely by buying beaten-down
sectors at the right time. In 2008, financial stocks were at the
center of the storm that threatened the global financial system.
AnETF that tracks anindex of banking stocks,
SPDR S&P Bank ETF (
fell more than 85% during two years, and some of the biggest banks
in the world fell even more.
, for example, fell more than 98%. Eventually, the declines stopped
and traders who bought near the lows were well rewarded. KBE is now
more than 160% above its lows and Citigroup is almost 300% above
Traders should always be on the lookout for the next
sectorturnaround , and I think I've spotted it. Turnarounds are
different than bottom-fishing, a strategy used by some traders who
try to buy while prices are falling in the hopes of catching the
bottom. I wait for prices to turn up and form a recognizable
bottoming pattern on the chart.
Wewill never buy an absolute low with this strategy, but waiting
for prices to stop falling minimizes the risk on a trade.
Bottom-fishers often find that the stocks they buy continue
falling. Trading chart patterns that show a potential trend
reversal offers a trade with a higher probability of success and
risk can be minimized with a stop-loss that is based on themarket
action rather than guesswork.
Even though the chart says to "buy," buying into a turnaround
should be done with caution. I'm convinced that
Guggenheim Solar (
is ready to move higher in the short term, but this is definitely a
sector that will have to climb a wall of worry.
A JPMorgan analyst recently said, "We see theissues currently
plaguing the Solar (photo voltaic) industry -- significant
overcapacity and declining demand in Europe, which historically has
been the largest market -- continuing in 2013."
Other analysts arebullish and looking for the industry to enjoy
its best quarter ever in the fourth-quarter of 2012, a factor that
should boostearnings reports that will start coming out next
While the analysts are uncertain, the chart of Guggenheim is
The stock has actually been trending down since it started
trading in 2008. The chart above shows that Guggenheim took a break
from this trend in January for the past two years. These are
actually the kind of stocks that seem to be perfect candidates for
trading theJanuary effect .
Small-cap stocks show a tendency to outperform large caps in
January. Many traders believe this is because long-term investors
sell losers for tax purposes late in the year and buy them back 30
days later, again for tax purposes. By selling, they can recognize
losses on their tax returns.
The steady downward trend in solar stocks makes them ideal
candidates fortax selling since almost everyone who bought this ETF
will be showing a loss now. Tax law allows traders to recognize the
losses only if they wait at least 30 days before buying
theinvestment back. Solar stocks are in an industry that has
significant long-term potential and some investors will want
exposure to the industry, making them buys in January.
The weekly chart shows a small bottoming pattern has formed
since the beginning of November that projects aprice target of
$17.50. Resistance near $18.50, about 14% above the recent price
level, can also be seen on the chart. Support should be found at
$15, the top of the pattern formed in November, and that is the
level traders buying the stock should consider as the stop-loss,
risking about 8%, or $1.50.
As an alternative to buying Guggenheim, traders should consider
Januarycall options with an exercise price of $17. These options
are trading at about 20 cents and would be worth at least $1.50 if
Guggenheim reaches $18.50. Recognizing the high risk in this ETF,
traders buying calls should close the trade if the value of
theoption doubles, which, at current option prices, should happen
if Guggenheim reaches a price of about $17.40.
Action to Take -->
Buy Guggenheim Jan 17 Calls at 50 cents or less. Do not use a
stop-loss. Set price target at $1 for a potential 100% gain in five
This article originally appeared on TradingAuthority.com:
A Turnaround in This Beaten-Down Sector Could
Double Your Money in 5 Weeks