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Waters Corp. Two-Stage Bullish Breakout

01/30/12 09:44:18 AM
by Donald W. Pendergast, Jr.

When a large-cap stock bolts upward by nearly 8% in one session, momentum players start sizing up the situation, looking for an entry point.

Security:   WAT
Position:   Buy

The Deel New Highs screen is an "old reliable" when it comes to finding super-high momentum stocks and fresh, significant breakout plays. The latter type of setup is what's featured here in this chart of Waters Corp. (Figure 1).

FIGURE 1: NEW HIGHS. The top 20 new highs among S&P 500 component stocks for Tuesday, January 24, 2012.
Graphic provided by: MetaStock.
Graphic provided by: MetaStock Explorer.
Waters shares (WAT) have broken higher from a very well-mannered, long-running consolidation pattern (one that began on August 9, 2011, in the wake of the summer selloff) and have apparently done so with style. Just look at the beautiful two-stage breakout -- the resistance line connecting the September, October, and December (2011, all) swing highs was violated first, followed not long after by the horizontal resistance line coming off the same September 2011 swing high.

The stock jumped more than 7.9% on Tuesday in the process of doing so, and has no doubt jumped onto the watchlist of many a starry-eyed momentum player in the market. Long-term money flow is still hanging above its zero line (based on the Chaikin money flow 100-period histogram (CMF)(100)), which offers some hope to the bulls that the stock may just decide to continue on its merry way north for the near term.

FIGURE 2: WAT, DAILY. A gargantuan, high-volume daily breakout bar, one that now becomes the highest high since August 2, 2011, is something that is easy to spot on this particular chart; the stock gained nearly 8% in just one trading session.
Graphic provided by: MetaStock.
I've plotted the MetaStock Intellistop (long-term version) on Figure 2, as it gives traders with a longer than swing trade mentality an idea of where a logical trailing stop might go, particularly if trading a covered-call setup in WAT.

These trailing stops are standard in MetaStock 11 and come in both short-term and long-term varieties and can easily be plotted for long and short trade setups. Currently, the stop value is at $75.62, nearly $10 below Tuesday's close of $85.04 -- meaning that traders considering putting on a stock-only position here need to use modest trade sizing if they wish to keep their risks small.

For example, if you have a $50,000 equities account and want to risk no more than 1% (or $500) of your account value on this trade (assuming an entry at $85.04), your risk per share is $9.42. So if you divide $500 by $9.42, you end up with 53 shares as the maximum position you can put on (assuming you are not using margin, and if you are, then shame on you for trading such a potentially risky long entry with that added element of risk) at a 1% risk factor.

Playing WAT might involve waiting for a modest intraday pullback over the next few sessions (big breakouts like this often invite near-term profit taking) before going long and then holding on for as long as a 60-minute trendline of any subsequent up move manages to stay inviolate. More conservative traders could just do the boring old covered-call routine, using near-term options that have lots of fast time decay (theta) working for them.

Since bid-ask spreads are of prime importance to successful option traders, make sure you know how to work a bid to get as much premium as you can for the call or calls you decide to sell on this particular buy-write setup. The pennies saved will add up to dollars over the course of a successful trading career.

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:

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