The chart shows that this company had a difficult time breaking through $24 in 2005 and retreated to the sub $20 levels in 2006. Now it’s managed to take out the once impenetrable $24 and is holding steady at $25, which if you do some extra work and look at a decade chart, you can see this is a hugely important point. It’s tried to take out $25 no less than 5 other times and has failed each time.
Now, there’s no sure way to tell if this time will be different, until the break actually occurs, but the chart is so unique (there aren’t many stocks near eight year highs) that traders everywhere are talking about it. If in their excitement of a possible breakout, their buying bids up the price and actually helps create the breakout, the self-fulfilling prophecy rings true, the break occurs, and more traders pile on because this long term breakout suggests further gains ahead. Well, why does strength suggest further strength?
Think about what a breakout actually means. Five times this stock has tried to breakout of $25 and failed. So, now every potential seller in the short term has keyed up their sell orders to execute right under $25, since they don’t believe the stock will breakout. So, you have a wall of sellers directly below a key breakout point. If, there are enough buyers to break down this wall of sellers, then think about how the price will act once the buyers stream forward into open territory where there aren’t any walls? This buying crusade should attract further buyers because they’ve proven they can break down significant obstacles and will only get stronger. Maybe the buyers will have such a good time partying together and growing in size that they’ll crusade all the way to $26 or $27.
Obviously, significant corporate events like earnings can move stocks more quickly, but realize that chart patterns move stocks, too!
I will be appearing on CNBC tonight right before 8 pm EST with actor Willie Garson (Trading With The Stars) because he went all in on my Tuesday pick Robbins & Myers and was rewarded with a 20% gain pushing him into first place. I will also have two new picks for the upcoming week, so tune in!
Timothy Sykes is a hedge fund manager and star of the reality show Wall Street Warriors. He can be reached at www.timothysykes.com.
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