Today I'm going to be highlighting three stocks poised to breakout to a new all-time high while introducing StockCharts.com Technical Rank (SCTR indicator). This indicator is used to identify relative strength (outperformance) versus its peers, not to a benchmark like other relative performance indicators. This is because benchmarks such as the S&P 500 are dominated by large-caps and may not truly reflect the market as a whole. SCTR sorts all stocks within a specific universe (the TSX in this case) which allows chartists to see how a stock is performing relative to other stocks. Since most fund managers' goal is to outperform the benchmark, money tends to flow into stocks showing outperformance. When combined with the following technical setup such as a stock breaking out from a base (strong chart pattern) to a new all-time high, this strategy can not only be very powerful, but very profitable. As I mentioned in an earlier blog, being able to identify this type of breakout not only allows investors to take a position in stocks during the early stages of an uptrend (often the starting point of a major price move), but also allows investors to take advantage of this asymmetrical equation that often translates into an acceleration in upside price momentum as there's no resistance (overhead supply) from people selling at a loss (everyone in the stock is now a holding a winning position). One must always define their risk beforehand and set a stop-loss order in the event of a signal failure.
Three recent examples to demonstrate the power of this type of technical setup upon breakout followed by the asymmetrical equation are shown below:
This week's three ideas:
Cargojet (TSX:CJT)
After consolidating for the past year within a continuation triangle Cargojet (TSX:CJT) is threatening a breakout to all-time highs. Price action has formed a flagging pattern near the apex of this triangle and is now trying to push above the resistance line. The technical indicators are confirming this price action and suggest that the path of least resistance is higher. Watch for a breakout as the momentum dynamics often shift (accelerate higher) when a security reaches a new all-time high. As the old saying goes, "the bigger the base, the higher the space".
TMX Group (TSX:X)
After breaking out to an all-time at the beginning of May, TMX Group (TSX:X) has spent the last 2 months consolidating within a pennant continuation flagging pattern. Last week price action started to push higher from this pattern and actually printed another new all-time high. This is an example of stocks that make a new high often continue to make more new highs due to no overhead resistance. The SCTR ranking has surged to a reading of 92.68 suggesting a continuation in outperformance while the RSI indicator shows an acceleration in upside price momentum. One must remember the RSI indicator can become and remain overbought for long periods of time during a strong price move.
WSP Global (TSX:WSP)
WSP Global (TSX:WSP) is attempting to break out to a new all-time high from an inverse head and shoulders continuation pattern as the SCTR ranking pushes back into the top performing quartile (above 75%). One must learn how to use volume analysis to confirm these price patterns. The volume profile on this chart is a textbook example for what one wants to see occur during the construction of an inverse head and shoulders pattern. Often volume on the left shoulder is intensely followed by continued selling which creates the decline that forms the low of the head. After the formation of the head, volume patterns must be watched carefully to look for expansion during the advances (as occurred during the ramp into the right shoulder). After the reaction high of the right shoulder forms the second neckline point, the decline should be followed by low volume. It is normal to experience profit-taking after an advance. Learning volume analysis will also help investors differentiate between normal profit-taking and heavy selling pressure. One can also use an indicator such as the OBV (On-balance volume) to measure volume. During a light volume pullback, the On-balance volume indicator should remain strong as it has on the chart. For the completion of this pattern to be considered valid, one must watch for expansion in volume upon the breakout.
The author of the article does not own any positions in the above mentioned securities at the time of publishing.
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By Dwight Galusha from SetYourStop.com
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