|Although the current mega-rally in the US broad market indexes looks a little long in the tooth, there still seem to be plenty of stocks exhibiting bullish price action, such as Mylan. Inc. (MYL). The stock has been in a steady uptrend since August 2010 and now appears to be in the final stages of breaking higher from a large seven-week consolidation pattern. Figure 1 is a closer look, using the daily chart of this Standard & Poor's 500 health care sector component stock.|
|FIGURE 1: MYL, DAILY. An RMO swing buy signal occurring at what may be the termination of a triple-top breakout buy pattern in this stock gives added credibility to this long trade setup. Strong long-term money flows and a bullish Aroon (14) indicator also add to the appeal of this trade setup.|
|Graphic provided by: MetaStock.|
|Triple-top breakout buy patterns don't appear too often, but when they come with a host of supporting technical confirmations that the line of least resistance for the stock is up, then this interesting pattern takes on even greater significance.|
Essentially, in a triple-top buy pattern you want to see the top three swings (understanding that the third swing is still in progress) to end at approximately the same price/resistance level, even as the down swings continue to make higher lows. You also want to see some sense of proportion between the swing highs; in this case, the three swing highs are fairly evenly spaced. Overall, the pattern should paint a convincing image of a stock ready to launch higher once the upper resistance barrier of the pattern is decisively broken.
Of course, it also doesn't hurt to have some, if not all, of the following bullish technicals working in the pattern's favor, too:
* Positive long-term money flow
* Above-average relative strength versus the stock's parent index
* The Aroon (14) indicator moving strongly to the bullish side of the aisle
* An RMO swing buy signal occurring at/near pattern completion, which is where the setup may be right now.
Finally, if you see such a triple-top breakout buy pattern print as part of a larger consolidation pattern occurring after a strong initial upthrust (the August to October move up from the major low), then you have even more reason to have confidence in the likelihood of bullish follow-through for the pattern.
This current setup on MYL's daily graph meets or exceeds all of those basic criteria for a valid, tradable triple-top breakout buy pattern.
|With MYL trading at $20.68 (Tuesday's close), why not consider buying a January 2011 $20 covered call for $19.50 or better? If the stock does follow through and stages a strong breakout, you may simply have the honor of having your shares called away at January options expiration on the third Friday of January 2011. If that happens, you'll have earned an approximate 21% annualized return in about five weeks -- not too bad in an era of 2% CDs and 1% money market accounts. Since the call sold is in-the-money, you also have a bit more staying power in case the stock backs and fills a bit before deciding which way it wants to go. |
And as for managing this stock/option position, well, this one is a piece of cake -- the long-term uptrend line on the chart is a perfect stop-loss template for you to follow. Just keep extending that dashed blue line in your own charting platform and consider holding on to the covered call position for as long as MYL stays above the line on a closing basis. If you see the stock close below the line, just liquidate the entire position, no questions asked.
That uptrend line will likely be viewed by pro institutional traders as a key line in the sand, one that would be a very wise technical tool to make maximum use of on a trade like this one.
In addition, try to limit your maximum loss on the trade to 1% (and preferably less, if possible) of account equity. Based on the price level of the line right now, you're looking at about a $1 stop-loss, which may help you to better calculate your initial position size for this trade.
Limiting risk should always be job 1, no matter if you trade stocks, options, futures, forex, or bonds. Traders who consistently hedge against catastrophic loss are usually the ones who enjoy the longest and most rewarding trading careers. Follow their example, and you'll be very glad you did.
|Title:||Writer, market consultant|
|Company:||Linear Trading Systems LLC|
|Jacksonville, FL 32217|
|Phone # for sales:||904-239-9564|
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