Stock On The Verge Of A Breakout That Could Result In A Big Rally
As a technical analyst, I am more concerned with a stock’s reaction to news than I am with the news itself. And with a stock such as that of chicken producer Tyson Farms (NYSE: TSN), the chart is showing positive reactions following all sorts of news.
#-ad_banner-#For example, the day China banned the import of American chicken and eggs due to a bird flu scare, many stocks in the sector tumbled.
Tyson was off 3.1% on Jan. 12, but just two days later it began a rally that would go on unabated for eight trading days and gain back more than was lost. That is what I would call “shrugging it off,” and it is a positive sign for the stock.
However, since the major trend was still sideways, sellers once again got active and prices eased. Then, on Jan. 30, the company topped analysts’ earnings estimates on surging sales. The bullish reaction to the news was to be expected, as TSN jumped more than 3% at the open.
But then something strange happened.
Investors got cold feet and turned on the stock, sending prices tumbling to close the day off nearly 3% and 7% below the day’s high. That seemed to be a giant sell signal as the market rejected good news. But the next day things changed. TSN once again embarked on a long, unabated rally for most of February.
This time it shrugged off bad market action and a potential bearish pattern on the charts.
Tyson is best viewed on a long-term chart, on which the sideways range becomes quite clear. We can also see that the range is contracting over time, leaving a pennant formation in place following a sharp rally from its 2012 low. Shares nearly tripled from that level, but the stock has been consolidating that gain since early 2014.
Given the shape and position of the pennant pattern after a rally, it looks as if TSN is nearly ready to resume its upward march. The official breakout will be a move above the upper border of the pattern, currently at $43.
However, there are reasons why buying now is not a bad idea. Some people might call them solid fundamentals, but I view them as intermarket technicals.
First, peers in the food industry, and specifically competitor Sanderson Farms (NASDAQ: SAFM), are beating earnings estimates. Next, the Dow Jones U.S. Restaurants & Bars Index, which contains many of Tyson’s larger customers, scored a major long-term breakout in January and has not looked back. And commodity input prices, specifically corn, remain in a bear market.
Finally, something that is indeed pure fundamentals, demand for chicken is growing, and Tyson said it expects to garner higher profit margins on poultry.
If and when the stock breaks out from its pennant pattern, we can expect it to hit an upside target near $52, which is derived from projecting the height of the pennant up from the breakout point, by the fourth quarter of this year.
Recommended Trade Setup:
— Buy TSN at the market price
— Set stop-loss at $38
— Set initial price target at $52 for a potential 27% gain in eight months
| Amplify Your Gains: Generate 115% From a 27% Stock Move Using options, we can amplify TSN’s potential 27% move into a 115% gain. Specifically, we recommend buying TSN Jan 35 Calls for $7.90 or less. This call option has a delta of 77, which means it will move roughly $0.77 for every dollar that TSN moves, but it costs a fraction of the price of the stock. The trade breaks even at $42.90 ($35 strike price plus $7.90 options premium), which is 5% above current prices. If TSN hits Michael’s upside target of $52, the call options will be worth at least $17 ($52 target minus $35 strike price). Once you enter the trade, place a good ’til cancelled (GTC) order to sell your calls at that price. Profit Amplifying Trade Setup: — Buy TSN Jan 35 Calls at $7.90 or less If learning how to make profit amplifying gains like this on your own interests you, I can’t urge you enough to watch this interview. In it, one of America’s top options traders reveals his strategy on camera for the first time. It’s a technique that allowed him to retire wealthy at the age of 23 and continues to pay for his affluent lifestyle to this day. Click here to watch the interview now. — Profitable Trading Staff |
This article originally appeared on ProfitableTrading.com: Stock on the Verge of a Breakout That Could Result in a Big Rally