As I have said many times in the past in these pages there are two basic types of analysis for anything traded, fundamental and technical, and the best trades are when they both suggest the same thing. Usually, because I generally adopt a “top-down” style, the fundamental case comes first, and is then confirmed by the technical. Sometimes, however, I am struck by a chart first and the more I think about it, the more the fundamental case supports the trade. That was the case this week when I looked at the environmental services company, Clean Harbors (CLH). The big potential advantage when that happens is that the technical factors can protect you on the downside, and can even provide a short-term pop, after which the fundamental factors kick in to maintain that momentum.
(Click to enlarge)
Let’s start, as I did, with the chart. To anybody who knows my trading style the set-up here is pretty obvious. CLH has been essentially trading in a range all year, and a recent drop saw the stock approach the low of that range. It got to 51.43 before bouncing back to 52.82 over the last few days. That bounce is important for two reasons. Firstly it results in a potential level of support in front of the 52-week low of 49.63 off of which I would set a stop-loss. Secondly, the last move down forms the fifth wave of an admittedly imperfect but still recognizable Elliot Wave pattern. The fact that there have been five legs doesn’t necessarily mean that the move down is over, but it does increase the chances. So, with a stop level of say 49.20 that is less than seven percent away from your entry point and a target short of the top of the range at around 59.75 that would represent a profit of around twenty percent, the trade sets up nicely from a risk/reward perspective.
That makes it viable in a technical sense, but without a fundamental reason for CLH to move higher the time span of the trade would make that a fairly weak case. Fortunately, there is one.
Clean Harbors is an environmental services company that, among other things, offers clean-up and disposal services to oil companies with regard to hazardous waste. With an administration in the White House that favors deregulation and in an environment where capital expenditure by oil companies has been tight, that has not exactly been seen as a growth business so far this year, but that is in the process of changing.
The leak in the keystone pipeline last week that spilled 210,000 gallons of Canadian crude in South Dakota last week showed that where there is oil and environmental disaster is always possible. Oil companies think in terms of decades rather than years, so whatever the make-up of the current administration they will want to avoid a public relations disaster that could result in draconian regulations from the next occupant of the White House. Given that, as both production and capex increase, particularly in shale oil, guarding against environmental problems should and probably will be a priority for U.S. producers. There is of course no guarantee that Clean Harbors will be the sole, or even the main, beneficiary as that plays out, but as the largest, most high-profile company in the industry that is not needed for the stock to get a boost.
Put that all together and you have a stock that looks set to bounce for technical reasons and could well then get help from a situation friendly to its core business. That, with an upside close to three times your potential downside, makes CLH a buy.