Even in a bull market, strong stocks need to rest from time to time. 

#-ad_banner-#Aerospace giant and Dow 30 member United Technologies (NYSE: UTX) gained more than 60% from November 2012 — when the market’s current bull leg began — through April of this year before taking its breather. Since that peak, the blue-chip stock moved up and down in a trading range, or rectangle pattern.

As the range developed, it ran into that long-term trendline. I have found that this is not unusual, and it often does not signal the end of the rally. We have to give the larger feature — the trendline, in this case — the benefit of the doubt even if it was only broken due to the passage of time. A strong, sustained vertical move below the line would be a different story.

In May, shares attempted a breakdown below the trendline, but it was reversed immediately. Bears could not keep the selling pressure on as demand swelled to soak up all shares offered for sale. And the trading range continued.

After kissing the top of its range again, the stock’s next decline returned it to the long-term trendline. This time, however, UTX did not close below the line and even started to leave long tails on its daily bars. Intraday attempts to break the trendline to the downside failed to stick, and the stock closed near its highs of the day on Wednesday and Thursday. In candlestick parlance, we have a pair of bullish hammer candles.

Adding to the list of positive technicals, cumulative volume studies have been moving higher throughout the trading range. This suggests a buildup of demand even though prices were moving sideways.

And stochastics, which is a good indicator of strength within a trading range, appears to be bottoming at a higher level than at previous bottoms in March, April and May. Put another way, stochastics traditionally reads “oversold” in a trading range at low levels, but as a stock strengthens, the indicator does not fall quite as low. It is a subtle signal but an important one.

Finally, the failed breakdown below the long-term trendline, as mentioned above, adds to the bullish evidence. Failed bearish signals often become bullish signals.

With the market shaking off its traditional “day after the Fed” dip, UTX looks poised to attack the top of its range and then break through to new highs. 

 Action to Take –>
— Buy UTX at the market price
— Set stop-loss at $115
— Set initial price target at $128 for a potential 9% gain in six weeks

This article was originally published at ProfitableTrading.com: 
Failed Breakdown Signals This Blue Chip is Now a ‘Buy’

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