Medium term
Trade view / 14 July 2014 at 8:23 GMT

Continental AG offers a defined-risk bounce opportunity

Trader / TheSteadyTrader.com
United States
Instrument: CONG:xetr
Price target:
Market price:
Background

Shares of German tire and automotive parts manufacturer Continental AG (CONG:xetr) stood out to me last week as they once again neared their 200-day simple moving average (red line). This line currently also coincides with the stock's early 2009 up-trend, thus offering traders and investors alike a terrific line in the sand for risk management purposes, i.e. clearly-defined risk.  

First up for a little perspective, note that the index representing the European Automotive & Parts industry (FESAc1) is also trading near the lower end of its range, which could offer a bounce in the near term. However, if a bounce fails then the downside in the group becomes more attractive. This helps us to clearly define our risk on a potential bounce play in shares of Continental.
European Automotive & Parts Index
Source: Saxo Bank

On the logarithmic multi-year chart of Continental AG, the up-trend line is clearly visible. Each time the stock got too far removed from the up-trend, it mean-reverted back toward it, or began to consolidate sideways, allowing the trend line to catch up.

Continental AG
Source: Saxo Bank

On the daily chart we see that last Thursday shares of Continental bounced off their intra-day lows, which took place near the 200-day moving average (red line), and that, as discussed above, also coincided with the 2009 up-trend line. Momentum as measured by the slow Stochastic oscillator last week also got oversold as the stock on an intraday basis last Thursday slipped out of what may be labeled as a bull flag pattern, which is pressing against the March resistance line (upper blue line). All of this points to a good-chance bounce in the stock in coming days or so, with very defined risk at last Thursday's lows.

Continental AG
Source: Saxo Bank


Management and risk description

Continental AG is scheduled to report its next earning on July 31, or in about two and a half week's time. For my part, I will be looking to be out of this trade again at the latest a day or two before the earnings announcement.

Parameters

Entry: Buy the stock at EUR 167.50

Stop: EUR 161.40

Target: EUR 175

Time horizon: 2 - 5 weeks

— Edited by Clare MacCarthy

Disclaimer:
Non-independent investment research
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