Buy This Stock When it Pulls Back

The community banking and financial services corporation headquartered in Defiance, Ohio, First Defiance Financial (NASDAQ: FDEF) seems to be gearing up for a surge after a slight correction as per its latest charts.

There are quite a few bullish indicators in FDEF’s charts.

Bullish Indications

#1 Ascending triangle pattern breakout: FDEF’s daily chart shows that the stock had broken out of an Ascending Triangle pattern. An Ascending Triangle pattern is a bullish pattern. This is marked on the daily chart in purple color. The breakout level of the triangle is usually a good support level.

Daily Chart FDEF

#2 MACD above signal line: As you can see from the daily chart, the MACD line (blue color) is currently above the signal line (orange color), indicating a bullish bias.

#3 IH&S Breakout in Weekly chart: As you can see from the weekly chart of FDEF, the stock had recently broken out of an Inverted Head and Shoulders (IH&S) pattern.

This IH&S pattern is marked in the chart in orange color.

An IH&S pattern is a strong bullish pattern and indicates that the stock may move higher in the short term.

Typically, a stock corrects back to the breakout level of the IH&S pattern before resuming its upmove.

Weekly Chart FDEF

#4 Uptrend Unbroken: The weekly chart shows that the uptrend of FDEF is still unbroken as the price has been making higher highs and higher lows. The stock is also trading above its 50-week and 200-week SMA which is yet another bullish indication.

However, the stock may correct until the breakout level of Ascending triangle pattern and inverted head and shoulders pattern before resuming its upmove. This is because

  • Doji: The latest candlestick in the daily chart is a Doji. Doji is a neutral candle which shows indecisiveness between buyers and sellers.
  • Overbought RSI: The daily and weekly chart of FDEF shows that the RSI is overbought, which is a bearish sign.

Recommended Trade (based on the charts)

Buy Levels: If you want to get in on this trade, the buy levels of FDEF is when it pulls back and reaches the breakout level of ascending triangle and IH&S pattern. This translates to around $56.

TP: Our target prices are based on Ascending Triangle and IH&S pattern breakout. This translates to first TP of $65 and second TP of $75.

SL: To limit risk, place a stop loss below the right shoulder of the IH&S pattern at $50.60. Note that this stop loss is on a closing basis.

Our target potential upside is nearly 16% to 34% in the next 4-6 months. For a risk of $5.4, the target rewards are $9 and $19. This is a nearly 1:2 and 1:4 risk-reward trade. In other words, this trade offers nearly 2X – 4X more potential upside than downside.

Risks to Consider
The stock may reverse its overall trend if it breaks down with high volume from the IH&S pattern and ascending triangle breakout level. The sell-off of the stock could also be triggered in case of any negative news, overall weakness in the market, or any regulatory changes in its sector.

Happy Trading!


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