Michigan-based energy company CMS Energy Corporation (CMS) seems to be getting ready for a price bump in the short-term.
The electric utility company shows quite a few bullish indications in its charts.
Bullish Move – Chart Indications
#1 Moving towards lower channel support: As you can see in the daily chart below, CMS has been trading within a channel for the past several months.
The stock has typically taken support at the lower channel line before bouncing back. It’s currently moving downwards towards the lower channel line after a previous bullish move to the upper channel line, indicating that it’s getting ready for its next big move. This is a bullish sign.
#2 Oversold RSI: The relative strength index (RSI) is said to be oversold when it is near 30 and overbought when it is near 70. Presently, the 14-day RSI reading for CMS is at 29.30. This indicates that the stock is getting oversold and a reversal of the downtrend is quite imminent.
[hana-code-insert name=’adsense-article’ /]Historically, for this stock, a reversal has happened when reaching the lower line of the channel.For example, in the beginning of July and October, the stock price reversed upon reaching the lower channel levels.
At the same time, you can see that the RSI is oversold.
#3 Additional Support near 200 day SMA: The stock’s daily chart shows that the price is currently above the 200-Day SMA. The lower channel also is close to the 200-day SMA. Both of these indicate strong support at this level. This is also the ideal entry point for trading this stock.
As the price moves down further until the support level is reached, RSI is expected to stay near 30.
Recommended Trade
If you want to get in on this trade, purchase shares of CMS when it reaches the lower channel at $46.60. Our initial target price is below the previous channel high, at $50.50. Since there would be a resistance level at the previous channel high, it is best to exit the trade and not wait until the top of the channel (nearly $53) is reached.
Those who are okay with taking some risk can exit half of your holdings at $46.60 and wait until the top of the channel is reached at nearly $53 to exit the other half. Either way we want to limit risk, so place a stop loss below $45.50, which is the last pivot low.
Our initial target potential upside using a buy price of $50.50 is 8.4% in the next 3 months.
For a risk of $1.10 per share, our reward is $3.90 per share, making this a near 1:4 risk-reward trade. In other words, this trade offers nearly 4x more potential upside than downside.
For those with a higher risk appetite, our secondary target price of $53 would offer 13.7% potential upside within 3.5 months. For a risk of $1.10 per share, our reward is $6.40 per share, making this a near 1:6 risk-reward trade.
Risks to Consider
CMS may reverse its overall trend if it breaks down from the current channel. 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 the energy sector.
Good trading!
Tara
P.S. Please keep in mind that these trade ideas are for information purposes only. We’re not registered financial advisors and these aren’t specific trade recommendations for you as an individual. Each of our readers have different financial situations, risk tolerance, goals, time frames, etc. You should also be aware that some of the trade details (specifically stock prices) are certain to change from the time we conducts our analysis… to the time we publish it… to the time you’re alerted about it. So please don’t attempt to make any of these trades without first doing your own due diligence and research.
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