Pick Of The Week – Analysis On Philip Morris (Week 2, 2022)

How did the US stock market usher in the new year?

The S&P 500 tumbled by 2.94%.

Volatility increased as market participants were probably spooked by the rate of infection caused by Omicron, and the Federal Reserve's discussion to raise interest rates sooner and faster.

With increased volatility and concerns of the state of the economy, are there bright spots in the stock market?

In such an instance, it'd be prudent to look at defensive sectors. Why?

Stocks in the defensive sectors are consumed and needed everyday, regardless of the state of the economy and market volatility. Therefore, they are shielded from the economic storm to an extent.

Defensive stocks distribute regular dividends which is a good source of passive income over the long run.

One such defensive stock is Philip Morris (PM).

In this article, we will be looking for short term trading opportunities in PM. Are you ready?

Big Picture

What can you tell from the chart of PM shown above?

Yes! PM was in a downtrend from Sep to Dec 21. Since then, PM has been and remains in an uptrend.

To identify possible trading opportunities, let's zoom out further and plot the key price levels of PM.

Key Price Levels

Zooming out, you'll be able to identify the key price levels of PM.

There's an immediate support zone at $96, an immediate resistance zone at $100, and another resistance zone at $102.50. What do these numbers mean?

Support and resistance zones are also known as demand and supply zones respectively. Hence, prices are highly likely to turn at the price levels of $96, $100, and $102.50.

How can you make use of this knowledge to help you know if you should trade PM right away?

Let's include 3 momentum indicators to help answer your question.

Technically Speaking

What do you notice about the 3 momentum indicators?

Good observation!

All 3 momentum indicators are in their overbought territory. This suggests that the rally is overextended, and could retrace in the coming few days.

In an event the price of PM retraces, where would it be likely to retrace to? What if it doesn't retrace?

It's good that you're thinking of probable scenarios. Let's list them down.

1. PM retraces to its immediate support zone at $96 and bounces to its immediate resistance level at $100
2. PM shoots for its immediate resistance zone at $100 and gets rejected, heading back to its immediate support zone at $96
3. PM shoots past its immediate resistance zone at $100, defying gravity to reach its next resistance zone at $102.50 

Which scenario do you think is more likely to occur?

At this juncture, I'd like you to pause for a second and think of your contingency plan. What will you do if you'd bought PM and things don't go your way?

In other words, where would your stop loss level be? 

There's an indicator which is useful in helping you to decide where your stop loss level should be placed at. Find out all about it here.  

Conclusion

In moments of uncertainty, you can shift your attention to defensive stocks such as PM. 

After being on a downtrend for 3 months, PM is finally on an uptrend. This uptrend is strong and overextended, so a retracement may occur anytime soon. When this occurs, I'd think that it'd be an excellent trading opportunity. 

Hence, I think that Scenario 1 is more likely. 

However, you'll need to know that I'm not a financial advisor, so please treat this article as education. Have fun conducting your research and I'd love to hear your thoughts in our Facebook Group. 

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