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| Posted by , Head of Investment Research

PAYX: The Trade That Was Wrong In All The Right Ways

[Note: as of 02/11/15, a long position has been established in the subject stock based on the parameters outlined at the end of this article. We have initial targets of 51.60 and 55.00 identified.]

Ten days ago, we wrote about a stock we thought was going higher based on its breakout from 11 weeks of consolidation. We were wrong. And we like it. At 360 Investment Research, we aren’t concerned about being right. We’re concerned about being on the right side of the trade. In this instance, our methodology was solid:

  • Price was breaking out to new highs
  • The breakout was occurring after 11 weeks of sideways price action
  • The sideways consolidation took place after a large cup consolidation
  • All the aforementioned was taking place within a well-defined weekly uptrend
  • We could identify when we were wrong (stops of 47.50 and 47.00)
  • We had a target based on the pattern (55.00) that held an asymmetric risk/reward ratio

With the aforementioned parameters, we would make that trade again and still could (more on that in a bit). In this case, we were stopped out at 47.50, which eliminated our exposure to the 5 day, 5% drop in price. Such an event will school you quickly on investment psychology. Our risk management was solid.

So what happened? Why didn’t our higher probability scenario of more new highs play out? Simple. Buyers disappeared. Price discovery (the determination of price) is rooted in the simple economic law of supply and demand. More demand than supply, the price goes up. More supply than demand, the price goes down. In this particular instance, price rose to new highs and demand disappeared. When breakouts like this one fail, it carries significance and means demand was exhausted. When this happens, price can experience quick downward pressure. Hence the phrase, “from false moves come fast moves.” This was confirmed in PAYX by observing the swift downward price action over five days. With technical analysis helping us identify a proper exit, we were able to avoid this rapid decline. In addition, it should be noted that it also allows us to change our trade to short. Knowing the aforementioned – that a failure of the breakout would likely mean rapid price decline, we’re able to jump on the other side of the trade quickly. A current month, in the money put option (near our exit point), gained over 60% in five days. That is the power of technical analysis – knowing when you’re wrong, which can put you on the right side of the trade.

As for the future plans on PAYX, we like that it held within the green upward price channel and found new buyers near its most logical point of demand (44-44.50). We’ll own it above 48.00. Below that price level, we’re not interested.

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PAYX Daily Chart

PAYX Weekly Chart

| Posted by , Head of Investment Research

Consider Taking Some Of Your Paycheck To Buy Paychex (PAYX)

Paychex, Inc. (PAYX) has a lot going for it. This commercial services company recently expanded its outsourcing capability with three notable value-adds:

  1. A cloud-based time and attendance service (bolt-on via its acquisition of Nettime Solutions last June)
  2. A mobile time-punch application called Paychex Time
  3. A health care product that helps clients navigate the complexities of the Affordable Care Act

In addition, their client retention level is 82% (an all-time high), their quarterly dividend has tripled since 2005, and their previous quarter earnings were up 9% while revenue grew 10% (the best in over four years).

More importantly, last week, PAYX broke through overhead resistance to new 52-week highs. The move comes after an 11-week price consolidation. Corrections take place in one of two ways – through price (declines) or through time (sideways price consolidation). Of the two, a correction through time is the most powerful. This bullish continuation pattern in PAYX has formed within an uptrend (note the upward price channel on the weekly chart below). In addition, last week’s breakout took place after a previous breakout from a bullish cup formation (see rounded line on weekly chart below) that took 45 weeks to form. That is a real nice base. Technicians know, “the longer the base, the higher the space.”

What’s great about price patterns is that our risk and reward are well defined. In this case, our reward target is 55ish, a 14% gain. And we can choose one of two stop loss levels to manage risk – either 47.00 (below previous weekly resistance now turned support) or tighter at 47.50 (a logical support level on a daily basis).

We have our entry (right now), our stop loss, and our target. We don’t enter a trade without an exit plan. So we have our game plan and will enter this trade because of the robust risk/reward opportunity. If we get stopped out, we don’t care. That means our risk management is solid. We’ve removed the emotion while identifying great potential gains. Enjoy.

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Paychex PAYX Weekly Chart

Paychex PAYX Daily Chart