To start the trading week off, we take a closer look at a real stinker of a stock that might just be ready for a long-term share price breakout. With volume soaring on a key static ($2.60) and dynamic resistance level (downward trend line), we believe that one more push from the bulls could shift sentiment in their favor.
The writing has been in the chart for a while. While we haven’t highlighted it, a head and shoulders pattern has also developed over the last year with the left shoulder occurring in November 2019, the head in April and the right shoulder in August.
Add it all up. A multi-month uptrend has been in play since April, a head and shoulders reversal pattern is visible over the last year and volume increasing right at a key inflection point for the stock in recent days. To us, this looks like a long-term trend direction shift in favor of the bulls is about to happen.
To be sure, we would want to see the ever important $2.60 resistance be broken with conviction. If we get that, more resistance looks likely around $2.75, $3.00, $3.25 and $3.50. While a technical breakout could generate quite a bit of bullish momentum, we don’t want to get too aggressive with our call, instead opting for a price target at $3.25.
As for support, we would watch the $2.50 and $2.35 levels on the way down. Realistically, if we are already in the stock and it starts sinking below the $2.50 level, we would look to exit the trade with minimal losses as we simply don’t want to see losses mount. As such, we would place a stop loss at $2.47 for this trade.
As mentioned off the top, the key for a successful trade is a break and close above the $2.60 resistance level. With that said, we would only enter the stock upon a close above $2.63, specifically on continued strong volume.
If shares cannot reach this entry signal, we would stay on the sidelines as a failed breakout could lead to another leg lower for the stock. Based on a $2.63 entry level, our upside potential looks to be 23.6% while our downside risk is limited to 6.1%.
If we’re right on this call, the upside potential could be around four times the downside risk on this trade.
