A Pair Of Breakouts
Once again, the market is giving us a
few new names of high relative strength base builders and a few breakouts. A
distinguishing factor seems to be volume. In some cases, I’m seeing robust
volume levels, others not.
Advance Paradigm
(
ADVP |
Quote |
Chart |
News |
PowerRating) Wednesday gained 3
1/8 to 42 5/8 on volume of 1.6 million shares, nearly triple its usual trade.
You could argue this one is a cup-with-handle breakout. I usually prefer to see
the handle form above the cup’s mid level (40 5/8 in this case) or at least see
the mid level of the handle (37 7/8) form above the mid level of the cup.
Advance Paradigm doesn’t pass that test.
However, the handle is particularly
sound looking. Notice the extreme volatility contractions after the Dec. 12
shakeout (see Point D in the above chart).
The daily price ranges tighten and tighten, like a coiling spring. Volume also
settles down to sub-par levels just before the breakout. That indicates that
shareholders are content to retain their stock at the market price, obliging
buyers to bid up the stock in the event heavy demand comes to market. That’s the
kind of supply-demand imbalance that primes the pump for the kind of explosive
price gain that we saw on Wednesday.
For long trades, I generally steer of stocks that
are priced below their mid levels. I presume such stocks are weighed down
by too much overhead supply. Overhead supply is the amount of shares in
the hands of shareholders with paper losses. These weak shareholders tend to look for exits and sell into rallies, blunting
further share-price progress.Â
You can find a stock’s mid level by
summing the pre-correction intraday high (Point A
in the above chart) and the correction intraday low (Point
B), then dividing the
result by 2. You can find the mid level of the handle in the same way. Add the
high of the handle (Point C) to the low of
handle (Point D), then divide by 2. The high
of handle, by the way, is the pivot point in a cup-with-handle base. You buy
once the stock exceeds the high of the handle by 1/8 point. On breakouts, try to
catch your buys as close to the pivot as possible. Don’t chase stocks more than
5% beyond the pivot.
I prefer to see a stock’s relative
strength line in new high ground on or before the price breakout. Advance
Paradigm’s RS line isn’t quite in new high ground, but very close it and with a
healthy upward slope, whether you look at the past six, nine or 12 months. The
stock has across-the-board 90-plus relative strength scores for the past three,
six and 12 months on the TradingMarkets StockScanner.
The fundamental picture look strong as well. The provider of health improvement
services has a three-year average annual EPS growth rate of 68.9%, a one-year
EPS growth rate of 56.2%.
Shares in The Shaw Group
(
SGR |
Quote |
Chart |
News |
PowerRating)
jumped 5 3/4 to 49 1/2, clearing a cup-with-handle base and breaking into new
high ground. Volume, however, came in at 510,100 shares, only 6% above the
stock’s 50-day moving average.
The stock holds RS scores in the high
90s for all three timeframes tracked by the StockScanner. Note the RS line moving into new high ground. As for fundamentals, the supplier of fabricated pipeline has accelerated to a one-year EPS growth rate of 34.7% from a three-year annual growth rate of 18.0%
The top field of all charts in this
commentary uses a logarithmic price scale and displays a 50-day price average in
red. In the second field, a
blue relative strength line represents the displayed security’s price
performance relative to the S&P 500. The third field displays vertical daily
volume bars in black with a 50-day moving average in blue for volume.
All stocks are risky. In
any new trade, reduce your risk by limiting your position size and setting a
protective price stop where you will sell your new buy or cover your short in
case the market turns against you. For an introduction to combining price stops
with position sizing, see my lesson,
Risky Business. For further treatment of these and related topics,
you’ll find extensive lessons in the Money
Management area of TradingMarkets’ Stocks Education section.
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