The market saw selling for five straight days from July 21 to July 27 before bouncing back a little. The selling took the S&P 500 down to the lower rail of the range the index has been stuck in for the last five months.
The selling hit the majority of stocks, and information technology firm CA Inc. (NASDAQ: CA) was no exception, falling from the $30.75 level down to the $28.50 level last week.
Looking at the charts and the sentiment toward CA, I think the selling has ended or at the very least is very close to ending and the stock will climb higher over the next four to six months. The daily chart shows how the stock came close to a support level at its low last week. The support was provided by the low back in December, and the price level is at $28.38.
The daily stochastic readings just made an encouraging bullish crossover, and the 10-day RSI just moved out of oversold territory. The RSI has only reached oversold levels twice in the last nine months, and one of those times was back at that December low mentioned earlier. Both times the RSI hit an oversold reading the stock bounced back by 5% or more in the coming weeks.
What intrigued me more about CA was the weekly chart. What I see from it makes me believe the stock is a better intermediate-term trade than it is a short-term one. We see on the weekly chart a trend line that connects the weekly closing lows for CA going all the way back to the fall of 2012. That trend line is currently right at the $28 level and could come into play if the stock drops below the December low.
The weekly oscillators are flirting with oversold levels, with the stochastic readings just recently moving out of oversold territory. The 10-week RSI hasn’t quite reached oversold territory.
If you look at the last time CA hit the trend line back in October, the stock bounced over 25% in the next five months. I look for a similar move this time around.
Yet another reason I think CA rallies over the next four to six months is the bearish sentiment toward the stock. The short interest ratio is a robust 7.5, and seeing that amount of short interest is encouraging from a contrarian standpoint.
When the stock starts rallying, the shorts will add buying pressure as they cut their losses and buy the shares back. Analysts are also bearish on the stock, with 13 out of 15 rating the stock as a “hold” or a “sell.”
I like CA for a 5%-10% jump over the next two to three weeks if you are looking for a short-term trade. However, I think the better trade is to buy the stock at its current level and hold it through the end of the year. I would target a move of 25% or more to take any gains, and I would sell if the stock closes a week below the trend line.
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