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MOVING AVERAGES


For CECE, The 200-Day EMA Assaults Keep Coming

05/07/09 09:57:24 AM
by Donald W. Pendergast, Jr.

All across the broad US markets, a variety of stocks are making bullish moves toward their 200-day exponential moving averages. Here's a look at an interesting trade setup in a fast-rising small-cap in the pollution control industry group.

Security:   CECE
Position:   Buy

The broad market's rebound from the early March low has been nothing short of breathtaking, and today's action in the markets was no exception. Many stocks have recovered a decent part of their bear market losses and some have even risen 100-200% from the November 2008 low. While no one can accurately predict how long this rally may continue, it's a safe bet that trading breakout moves above the 200-day exponential moving average (EMA) in stocks with strong money flow, robust trend characteristics, and increasing quarterly earnings will likely provide the active trader with the best possible risk-reward ratios of all. Here's a look at a small-cap stock that's on a tear, one that might continue for some time, judging from its solid technical and fundamental underpinnings.

FIGURE 1: CECE, DAILY. While the current breakout setup might allow traders the opportunity for short-term swing profits, it's possible that much more profit could be obtained by playing CECE for a long-term trend-following move, given the stock's outstanding fundamentals.
Graphic provided by: MetaStock.
Graphic provided by: Rahul Mohindar indicators from MetaStock v 10.1 EO.
 
Ceco Environmental (CECE) is a player in the pollution control industry group, providing solutions to a variety of industries in the US. Sporting a price/sales ratio of only 0.20 (in a world where a ratio of 2 or less is considered very good) and a projection for rapidly rising quarterly earnings for the next couple of years, CECE's recent bullish run (rising 150% since the November 2008 lows) obviously has solid fundamental pressures hard at work for current shareholders. Even better, the technicals for this small-cap flier look as appealing as its sales and earnings trend. (See Figure 1.)

First off, the sequence of higher highs and higher lows is still intact. Next, witness the hugely bullish posture of the Rahul Mohindar oscillator (RMO) at the top of the chart, testifying to the intense strength of the current run higher. The trendlines have also begun to accelerate higher even as the stock has printed a fresh RMO swing buy signal (red oval). This buy signal also occurred as part of a bullish breakout from a consolidation range -- way above-average range and volume (see the red 50-day EMA line of daily volume at the bottom of the chart for confirmation). Last but not least, CECE has also completed a convincing close above its 200-day EMA, which is a primary dividing line used to classify the bullish or bearish bias of a market's primary (long-term) trend.

The only negative here is that CECE is a light-volume stock, one that has only been averaging about 35,000 shares daily. Traders choosing to play this breakout may want to trade a little smaller size than usual, relying on limit orders rather than market orders to guard against excessive slippage.

Normally, these articles deal with short- to intermediate-term trade setups, but given the combined power of CECE's fundamentals and technicals, this might be a good longer-term trade for those who believe that the stocks in the pollution control industry group are destined for much greater gains in the months and years to come.

Here's a very simple "brute-force" trade entry and trade management plan for those who want a "set it and forget it" trade, one entered into with a very modest amount of money:

Put on half a position in CECE on a break above today's breakout high of $4.09. Place an initial stop just below the 50-day EMA at about $3.20, then wait to see if CECE completes a golden cross of the 200-day EMA by the 50-day EMA. In the interim, use the 50-day EMA as your trailng stop-loss. If the golden cross occurs, put on the second half of your position and let the whole thing ride until the 50-day EMA crosses below the 200-day EMA, hopefully a couple of years from now. The last time, CECE completed a golden cross the stock went from about $3.40 all the way to $18.14 in eight months before gradually fading back to the single-digit zone.

Had you waited for a death cross to exit (where the 50-day EMA crosses the 200-day EMA to the downside), you still would have tripled your money in this stock in the space of 17 months. And in a world of 2% certificates of deposit and "high-yield" 2.5% savings accounts, that's a pretty good return in anybody's book.



Donald W. Pendergast, Jr.

Donald W. Pendergast is a financial markets consultant who offers specialized services to stock brokers and high net worth individuals who seek a better bottom line for their portfolios.

Title: Writer, market consultant
Company: Linear Trading Systems LLC
Jacksonville, FL 32217
Phone # for sales: 904-239-9564
E-mail address: lineartradingsys@gmail.com

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