Telegraphing Breakouts
Same-store sales reports provided the
ignition and the fuel for rallies Thursday in Toys R Us, Kohl’s and American
Eagle Outfitters. Both stocks now are extended, though. Medium-term traders
should look to enter stocks right as they clear pivot points and not after
they’ve run up more than 5%.
Some of these stocks will give you a
chance to buy them, though, by your anticipating the gap-up move in the prior
session. Kohl’s
(
KSS |
Quote |
Chart |
News |
PowerRating) formed a bullish engulfing pattern Wednesday with
confirmation on the relative strength line. The value-priced retailer reported
that same-store sales rose 14.8% in the five weeks ending Dec. 30. Total sales
increased 37% to $1.18 billion.
While volume wasn’t the greatest, a
trader on Wednesday (see Point B in
following chart) could have use a handle-like pivot point, buying once the stock
moved 1/8 point above the Dec. 29 session high of 62 5/16 (see Point
A). On Thursday, the stock gapped up out of a 24-week
correction-recovery base on three times its usual trade.
American Eagle Outfitters
(
AEOS |
Quote |
Chart |
News |
PowerRating)
followed through Thursday on the prior session’s ascending base/cup-with-handle
base breakout. Shares in the apparel retailer put in yet another accumulation
day, impressive given the huge volume expansion in the prior session. The stock
rose 2 1/2 to 50 3/16 on nearly 3.6 million shares, triple average volume. For
my guidelines on counting accumulation and distribution
days, see my lesson Using Volume: The Key to Price & Liquidity.
In my Dec.
26 Trading The News, I warned about late-stage breakouts, citing
Anadarko Petroleum
(
APC |
Quote |
Chart |
News |
PowerRating) as an example. As you can see, the breakout has failed. Watch out for late-stage bases. This example is a little different
from others as Anadarko formed its bases during a bear market. Typically, you
see a winning stock form a succession of bases throughout a bull market. Once a
bear market or intermediate-term correction washes out a stock, you must restart the
base count.
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, of course, 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,
check out the Money
Management area of TradingMarkets’ Stocks Education section.