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WMB Growth & Income Trade Setup

With a current dividend yield above 16% & the technicals indicating a likely move up towards at least the 19.80 level, should the stock take out the minor (white) downtrend + 16.95 resistance level, WMB (Williams Companies Inc.) will be added as a Growth & Income Trade setup with an entry criteria of any print of 16.98 with a suggested stop below 15.80. (note: I had originally incorrectly listed the entry on this trade as any print of 16.80. That typo has been corrected to update the entry price of any print of 16.98).

WMB daily April 9th

WMB daily April 9th

 

Any or all of the overhead resistance levels (primary/yellow downtrend line + white horizontal lines) may be added as additional price targets, depending on how the charts develop & of course, assuming that an entry is triggered. Longer-term investors that might be considering holding out for any of those additional & currently unofficial, price targets could use a more liberal stop below the S1 level (14.55-14.65).

WMB is a natural gas operator, which aligns this trade with my longer-term bullish outlook on nat gas. However, WITHOUT EXCEPTION, risk & return go hand-in-hand. There are obvious fundamental reasons as to why Williams Companies is yielding over 16% in a near-zero interest rate environment. Additionally, WMB recently became involved in a legal tussle with Energy Transfer Equity LB, a company they are involved in a pending merger with, which you can read about by clicking here.

Bottom line: Always DYODD and as with all positions, make sure to properly diversify among various sectors/asset classes and if you decide this trade fits your risk tolerance, objectives & trading style, consider making a downward adjustment to your position size to account for the above above gain & loss potential on this trade. Props to member @cheri for putting this one on my radar!

note: This trade idea will be added also be added as a Swing Trade setup as well as a Long-Term Trade setup due to the likelihood of additional price targets & above average gain potential.

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13 Comments

  1. trgfunds April 9, 2016 10:53 pm at 10:53 pm

    @rsotc Hi Randy thanks for the idea. I’m curious with these income trades do you ever worry about the negative earnings and/or dividend being higher than the earnings? A sudden announcement of cancellation, lowering, or suspension of the dividend can take a stock into an entirely new lower range for years. Thanks again!

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    • rsotc April 10, 2016 12:26 pm at 12:26 pm

      trqfunds- Great point & although I touched on that in my closing notes on WMB, I think what you bring up is worth expanding on as well as a segue into a few closely related points that I would like to share. As my reply & additional comments will be lengthy, I’m going to address it in a separate post later today.

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      • trgfunds April 10, 2016 11:32 pm at 11:32 pm

        Just read your long reply. Now I feel guilty for making you write all of that LOL! Great commentary as usual though, and much appreciated. I do realize this is all just calculated risk/reward and very technical in nature (as well as the need for individual due diligence)… You have an excellent track record with these.

        I guess what I was trying to communicate is that, for the folks who may hold on to something like this longer term (beyond stops, in hopes for that giant dividend) the “income” part of this may not in fact be income at all. The old value trap / “reaching for yield” in ZIRP environment mentality, which I’m sure you’re very aware of, although some others may not be. Anyway, I certainly didn’t mean to question your credibility or ideas as I feel you’re probably one of the best out there. 😉 Thanks Randy!

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  2. lee1 April 10, 2016 6:53 am at 6:53 am

    Hi Randy, is it a break over 16.80 or 16.95 that triggers an entry?
    I am kicking myself as my mom who knows nothing about stocks came to me when this was just over 10 and asked if it was a good investment for her (my mom lives on a fixed pension so I need to try and help make money on stocks as banks give nothing). I looked at the dividend and told her this was way too risky and best stay away. It went up 100% shortly after. I am a great contrarian when it comes to stocks which is why I decided to start following you.
    Thanks.

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    • rsotc April 10, 2016 12:29 pm at 12:29 pm

      (edited with corrected entry criteria): lee1- Entry to be triggered on any print of 16.98 (i.e.- a break above 16.97, which is above the downtrend line and 2 cents above the horizontal resistance level). Thanks for clarifying as I know see the typo that I made accidentally listing 16.80. I’ll correct that asap.

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    • rsotc April 10, 2016 12:46 pm at 12:46 pm

      @lee1– Just to make sure that you saw my revised reply to your request for clarification on the entry price, I had to edit my previous reply to you as I fired off that response too quickly before double-checking the chart. To clarify, the entry criteria will be on any print of 16.98 on WMB, which will have taken the stock above both the downtrend line & the 16.95 horizontal resistance level.

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  3. lee1 April 10, 2016 7:33 am at 7:33 am

    Randy, forgot to ask if we also need some level of volume to trigger the trade or is it simply a break in price? Thanks.

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    • rsotc April 10, 2016 1:07 pm at 1:07 pm

      While I do often harp upon the fact that breakouts that occur on 1.5x or greater the average volume have considerably lower chance of the breakout failing, I’ll have to leave it up to each trader/investors to decided whether on not to take a breakout that is tracking at average or below average volume. Typically, such as with this WMB trade setup, I will adjust the entry price to slight above the actually breakout level in order to minimize the chances of taking a breakout on a brief pop a penny or two above the resistance level without any follow through buying.

      e.g.- The most significant technical level,likely to spark a breakout if cleared on WMD is last Friday’s reaction high of 16.75. That reaction high occurred on a test of the downtrend line with prices immediately reversing. As downtrend lines have a negative slope, the next time WMB clears the 16.75 level, it will also have cleared that downtrend line. However, when looking to position on a breakout of of any key technical level (TL, horizontal resistance, reaction high, etc..) I will always scrub the chart to make sure that there aren’t any other potentially significant resistance levels just overhead. If so, I’ll hold off on taking a position until/unless that level(s) is also cleared. In the case of WMB, that horizontal resistance line just above is actually at 16.94. Therefore, I’m allowing for a 4 cent buffer to help reduce the chances of taking of whipsaw signal, should prices just pop a penny or two above that level before reversing.

      To further reduce the odds of buying into a false breakout, here’s how to estimate how a stock is tracking compared to its average volume shortly after the breakout has occurred vs. waiting to see the end of day volume totals:

      Tracking volume at any point during the trading session = total volume up to that point in the day divided by the # of hours elapsed into the trading session X 6.5 (which is the number of hours in a trading session).
      e.g. If a stock has traded 1M shares at 11:30am ET, you would divide 1m by 2 (hours since the open) to get 500k then multiple that by 6.5 to get 3.25M (for an estimate total volume for the day based on how it is tracking so far). Compare that total to the 90 or 100 day average volume & ideally, the breakout should be tracking at 150% or more of the average.

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  4. lee1 April 11, 2016 10:51 am at 10:51 am

    Randy, WMB broke through 16.97 and ran to about 17.27 but is now around 16.90. In a case where a stock breaks above the TL then falls below you continue to hold with the stop as noted at 15.80 or is it prudent to sell once one sees a failure of the break in the TL intraday?
    Thanks

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  5. lee1 April 11, 2016 11:50 am at 11:50 am

    As a follow up, when one enters a swing trade like WMB, does one simply block out everything else, including oil price movement and the general market and simply stick to the TA (ie stop at 15.80 once entered over 16.97)? I ask because I am not experienced trading breaks of TLs so wonder if one should simply be patient after entry and block out all noise (oil price, market that may be rolling over, etc) and simply either have the stock hit the stop of 15.80 or break out over 16.97 (even if it broke out and failed this morning) to the initial target price?
    I notice from habit I tend to buy a stock and if it does not do what i expect rather quickly (such as remain over a support level) I sell it (for a loss) only to often later end up watching the stock run much higher (ie i get shaken out of the position quickly on a pullback below a resistance level or TL). In short I am asking when one plays your long swing trade ideas properly one must simply enter at the proper price and hold until a stop is hit (if that were to happen) -given that a pullback below the TL after breaking over it does not necessarily mean one should immediately cut the stock for a loss and that the stock is still in play- and also block out other factors such as oil price, market direction during the day, etc which may make one anticipate the stock doing something before it actually does it (in this case I would anticipate that if oil were to pull back WMB would also go lower so if I see oil pulling back during the day I would be tempted to sell WMB thinking it will just go lower)?I hope you understand my question as I am having a bit of trouble articulating it.
    Thanks.

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  6. lee1 April 11, 2016 12:08 pm at 12:08 pm

    I think I answered my own question and the answer is: do not sell a position even if it breaks over then under a TL unless it hits the stop level as the stock is still in play unless it hits that stop. And no point in trying to anticipate price movements based on the overall market action, oil prices or other factors such as lawsuits (old news), etc.
    Still holding after buying this morning.

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    • rsotc April 11, 2016 12:44 pm at 12:44 pm

      To answer your questions, while some traders are more flexible with their trading plan, targets, stops, etc.. It is probably best for most to just tune out all the noise and try not to second guess your position once entered based on other variables that may or may not impact it. Best in most cases to stick with your trading plan (targets, stops, etc..) unless something substantially has changed in technicals for that position that prompts you to either close the position early, be it at a loss or profit, OR to extend your profit targets, for example if the charts on both the position & underlying sector have become increasingly bullish since taking the position.

      Probably the best route for both part-time traders as well as those that struggle with discipline & patience would be to place an OCO or OCA order immediately after entering a position. Those are orders in which you set your profit target (sell limit) and your stop-loss order. When either order is hit, the other order is automatically canceled. A simple set-it-and-forget method that helps to add discipline as well as a useful tool for those that don’t have the luxury or desire to sit in front of a computer every day during market hours.

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  7. lee1 April 11, 2016 3:03 pm at 3:03 pm

    Thanks ,Randy ,for the explanation. I am glad I just held this morning when I started to think this was a failed trade, especially when it hit 16.70. Still holding and looking good right now. I will try the OCO, as you suggest. Until I learn more about TA I will just do exactly as you suggest when you recommend a trade re stops, targets, etc otherwise I will just be trying to anticipate things based on emotions or external variables that may not be all that important for swing trading purposes, as that usually never works out well for me.

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