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BREAKOUTS


Is CPLA Ready For Breakout?

02/25/09 03:17:55 PM
by Chaitali Mohile

Capella Education is consolidating at the nearest support. Can the stock weather the storm and breakout?

Security:   CPLA
Position:   Buy

Capella Education (CPLA) breached the previous high resistance in late November 2008. Since then, CPLA is consolidating with the newly formed support of $54. The support-resistance tool is used to highlight the resistance breakout. In Figure 1, CPLA has been consolidating in the wider range. But as the consolidation period extended, the range narrowed. The bullish consolidation formed the shape of a flag. The declining moving average convergence/divergence (MACD) (12,26,9) and the average directional movement index (ADX) (14) in Figure 1 might be the reason for the consolidation after the breakout at $54.

FIGURE 1: CPLA, DAILY. The stock has converted the previous high resistance to support. The consolidation is accumulating the bullish strength for the upward breakout.
Graphic provided by: StockCharts.com.
 
During the consolidation, CPLA formed a bullish engulfing candlestick pattern that retested the lower support at $54. The candlestick pattern indicated the possibility of an upward breakout. CPLA seems to be one of the strong equities that has held support when major indexes were under bearish pressure. Currently, the MACD (12,26,9) is likely to show a bullish crossover in positive territory. The relative strength index (RSI) (14) has to move above the upper range of 70 levels to add the strength in a price breakout. The ADX (14) is the only indicator suggesting the consolidation. But since the other two indicators, the increased volume, and the strong bullish candles on the price chart are indicating positive momentum, we can anticipate the upward breakout.

FIGURE 2: CPLA, WEEKLY. The bullish flag and pennant continuation pattern is formed.
Graphic provided by: StockCharts.com.
 
In 2007 and 2008, the stock failed to consolidate after the advance rally. Though CPLA made an all-time high at $75.38 (see Figure 2), the RSI (14) was highly oversold, the uptrend was overheated, and the MACD (12,26,9) declined, forming a bearish crossover. Due to these bearish conditions, the stock descended from the top. The stock formed a lower high at $66.85 during the downside journey of the indicators; as a result, the price plunged to a lower low at $34.78.

In Figure 2, CPLA has rallied almost 22 points from the low at $34.78. We can see that the stock has formed a long-term bullish flag & pennant continuation pattern. The stock is consolidating at a lower high for almost four months, which made the sideways move stronger. The ADX (14) is above 20, indicating a developing uptrend, and the positive MACD (12,26,9) is likely to surge in positive territory above the zero line. In addition, the RSI (14) has the robust support at 50 levels. The volume during the consolidation was encouraging as well, so the overall picture points to a bullish breakout. The potential target is 60 - 42 = 18 + 60 = 78. Traders can initiate a long trade at $60 only on a confirmed breakout with increased volume first with the target of previous high at $66. For the rally above $66, a fresh trade should be entered as CPLA might consolidate at both prior high resistances ($66 and $75).

CPLA is one of the stocks that consolidated during the mayhem in the financial markets. The stock is likely to break out in a bullish direction.



Chaitali Mohile

Active trader in the Indian stock markets since 2003 and a full-time writer. Trading is largely based upon technical analysis.

Company: Independent
Address: C1/3 Parth Indraprasth Towers. Vastrapur
Ahmedabad, Guj 380015
E-mail address: chaitalimohile@yahoo.co.in

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