Click chart to enlargeCategorize this one into the "fun trades, don't bet the farm" folder. This chart does not appeal to us because the channel is too broad, so it is not one we would normally be interested in.
However, it deserves a closer look. It's the chart of PetroBrazil, PBR. After overshooting the top of its channel by a mile, it has finally reached (and bounced off of) its bottom. PBR is similar to RIO and RIG, which are showing the same pattern. It's not just an intriguing chart, it has fundamentals in spades. PBR is the single largest holding of Ken Heebner's CGM mutual fund, comprising almost 9% of its value. He has not done well on PBR this year, with the stock down over 5%. We're betting that with Ken's stellar track record, he's on to something. Buying a stock with these technical and fundamental merits clearly puts the odds in your favor, particularly when you buy low.
We're going to buy a small amount of PBR here, making sure to allocate cash to average down with. On a longer term chart, PBR has yet to revert all the way to the bottom of its trend channel, although RIO and RIG both have. You can read this in one of two ways. Either PBR has some selling left in it, or it has more relative strength than the others. We chose to use a different metric, comparing it with the Dow instead. The Dow's July low was lower than its March low. PBR's July low was higher than its March low. If PBR managed to put in a higher low than it did 4 months ago all the while with the Dow plunging, what will it do while the Dow rallies? Our guess is that the huge drop from overbought levels has scared the weak hands out of the stock, and now it's time for both PBR and Mr. Heebner to have their day. Here is a link to Ken's holdings...
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