A Holiday Breakout For Krispy Kreme

12/27/06 08:30:02 AM

by Arthur Hill

After a big surge through resistance Krispy Kreme settled down to form a triangle, and the recent breakout points to further strength.

Security: KKD
Position: Accumulate

Before looking at the triangle, let's look at Krispy Kreme (KKD) with Bollinger Bands (Figure 1). The middle band is the 20-day simple moving average (SMA), the lower band is two standard deviations below, and the upper band is two standard deviations above. The bands contract as volatility narrows and expand as volatility expands. Late September and early October saw the last contraction, and this led to the October surge (blue box). Note how the bands expanded at the end of October and in the beginning of November. The bands once again contracted in mid-December, and the recent surge above the upper band is starting a volatility expansion.

FIGURE 1: KRISPY KREME. Late September and early October saw the last contraction, which led to the October surge (blue box).

Graphic provided by: MetaStock.

Figure 2 saw KKD surge above resistance in October with a strong move. Broken resistance turned into support and the stock successfully tested this support level in early November. A triangle evolved over the last six weeks and the recent breakout at 10.5 signals a continuation of the September-October surge. The first move was three points (7.5 to 10.5) and a corresponding move would extend to around 12.5 (9.5 + 3 = 12.5).

FIGURE 2, KRISPY KREME. KKD surged above resistance in October with a strong move.

Graphic provided by: MetaStock.

Broken resistance at 10.5 turns into support and this is the first level to watch for signs of weakness. While a move back below 10.5 would challenge the breakout, this is a volatile stock and we should allow some leeway. The lower triangle trendline and 50-day moving average mark support around 9.5-9.7. In addition, this week's low marks support at 9.6. I would stay bullish on KKD as long as support at 9.5 holds.

Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

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