Insurance stocks — especially one name — are about to break out, charts show
Since the start of June, we have seen volatility return to the market with a vengeance. The intraday swings have been nauseating for even the most seasoned traders. So, when market moves start to create mayhem for your portfolio, it may be time to look for a little insurance. In this case, we are referring to insurance stocks. When we break down the charts we see they have been slow, steady and trending sideways for years but that is changing. One stock in particular is leading the change: Allstate . While high-growth names have been caught in the market’s tug-of-war between interest rates, valuations and economic uncertainty, this insurance giant has quietly shifted into high gear. The stock has not only weathered the storm, it’s accelerated past many of its peers as shares just hit fresh all-time highs. When looking at this trade, let’s break it down three ways. First, we examine the insurance sector ETF, the iShares U.S. Insurance ETF (IAK), of which Allstate is the fourth largest holding making up 6.4%. I wanted to identify a sector that was faring well, relatively stable and technically attractive over the longer term. Looking at the IAK ETF chart over the last five years on a weekly basis we see a sector stuck in neutral. It’s traded roughly between $125 and $138 for almost two years. This is hardly exciting. There is a chance it remains in this channel for some time, but it’s worth watching as we trade near its upper limits. Can this be the time it breaks out? More importantly, when you see how this market is acting and where the strength is, you’ll notice many names within this sector outperforming. Then when looking under the hood to see what stock within the sector has outperformed on a relative basis, we see Allstate standing out. Next, we break down the stock itself. We know it is outperforming the sector, but is it giving us a strong buy signal? Here on the one-year daily chart we see a break above resistance for the second time in three weeks. The first time shares broke above resistance, they failed to hold above this key level. Will this time be different? We’ll soon know but the risk/reward for a very short-term trade is favorable to play the momentum. Use a tight stop-loss just under $220 if you lack the patience for this trade to play out over the coming weeks. Then look to buy it back again if it tests the lower end of this neutral channel. However, this time feels different. We will likely get a clearer picture and confirmation of the strength of this current breakout by next week. That’s where the longer-term five-year weekly chart helps give perspective. On the weekly chart you can see that rising wedge formation much more clearly. The breakout has occurred, but we need the weekly candle to close above $220 for confirmation. Adding to my excitement is last week’s candle which we call a bullish engulfing candle. The magnitude of this weekly candle cannot be underestimated and seeing the follow through this week just confirms its significance. Also adding to our bullish technical checklist is that our momentum indicator in the RSI has finally broken its downtrend and is confirming recent price action. This break along with price making new highs in a challenging environment is why we believe the risk/reward is quite favorable for an entry in the name now. Upside targets based on a breakout from this formation give us targets over the next six to nine months of $250 to $260. It’s rare when insurance stocks move with alacrity, but the path higher is there and momentum may help it pick up speed. The trend is our friend here and for those looking to avoid some of the excess volatility of late, then you’re in good hands with Allstate. —Jay Woods, CMT with Chase Games DISCLOSURES: None All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, or its parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
