The American insurance company and the largest provider of supplemental insurance in the United States, AFLAC Incorporated (NYSE: AFL) seems to be poised for a decline in its price in the near term as per its latest charts.
#1 Head and Shoulders Pattern: There is a head and shoulders pattern currently being formed on the daily chart of AFL. This pattern is marked in orange color lines. A head and shoulders pattern is a bearish pattern and a breakdown from it usually indicates that the stock may move lower.
#2 Bearish Cross Of Chaikin Oscillator: As seen from the daily chart, the Chaikin Oscillator value has crossed below zero.
Prices usually start to fall whenever the crossover happens from above the zero line to below the zero line.
This is a possible bearish sign.
#3 RSI moving down: The RSI is currently moving down from above 50, indicating possible weakness in the price movements.
#4 Broken Uptrend: The weekly chart shows that the stock has broken down from its prevailing uptrend.
The uptrend line is marked in purple color in the weekly chart below. The stock then attempted to close above the trend line but was not able to do it, indicating possible weakness. A breakdown from an uptrend line usually indicates a bearish bias.
#5 Bearish ADX and DI: The ADX and DI indicate bearishness. This is because (+DI) < (-DI); ADX and (-DI) are above (+DI); and ADX has started rising from below both (+DI) and (-DI). All these points to possible bearishness.
Recommended Trade (based on the charts)
Sell Levels: If you want to get in on this trade, the ideal sell level is if the stock breaks down below the Head and Shoulders Pattern at around $41.20.
But for those with higher risk appetite, you can choose to take half the intended quantity of short positions on AFL at the current price of $45.20.
TP: Our target prices are $38 and $30 in the next 3-6 months.
SL: To limit risk, place a stop loss at $47.20 (for short positions near $45.20) and $42.40 (for short positions near $41.20). Note that this stop loss is on a closing basis.
Our target potential downside is 8% to 34% in the next 3-6 months.
- Entry near $45.20: For a risk of $2.00, our target rewards are $7.20 and $15.20. This is a nearly 1:4 and 1:8 risk-reward trade.
- Entry near $41.20: For a risk of $1.20, our target rewards are $3.20 and $11.20. This is a nearly 1:3 and 1:9 risk-reward trade.
In other words, this trade offers nearly 3x to 9x rewards compared to the risks.
Risks to Consider
The stock may reverse its overall trend if it breaks upwards from the descending triangle pattern with high volume. The breakout of the stock could also be triggered in case of any positive news, overall strength in the market, or any regulatory changes in its sector.