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BREAKOUTS


PriceSmart, A Stock To Watch

05/10/12 11:23:24 AM
by Chaitali Mohile

The consolidating range of PriceSmart can be traded for the short term. A breakout would lead to a robust bullish rally.

Security:   PSMT
Position:   Buy

PriceSmart (PSMT) is in a long-term uptrend. A few corrective rallies of PSMT reversed the uptrend temporarily, pouring confidence in bulls to recapture the trend. PSMT began a bullish journey in 2007, and entered a fresh bullish trend. In 2008, however, the rally retraced to its 50-day moving average (MA) support. The uptrend indicated by the average directional index (ADX) (14) was overheated, as seen in Figure 1 and it started plunging from 40 levels. An overheated uptrend reversed, weakening the current trend. The 50 day MA acted as support to the emerging selling pressure. The negative directional index (-DI) of ADX (14) failed to surge above 30 levels, indicating a lack of bearish force.

Eventually, the buying pressure regained and the trend surged in favor of the bulls. PSMT resumed its bullish path with the support of the short-term moving average. Thereafter, the rally climbed to make a new high at 75 levels.

FIGURE 1: PSMT, MONTHLY. The bullish flag & pennant formation of PSMT has broken upward.
Graphic provided by: StockCharts.com.
 
The relative strength index (RSI) (14) moved horizontally in an overbought region, resulting in a sideways consolidation of the price rally. The moving average convergence/divergence (MACD) (12,26,9) is positive, indicating a bullish momentum in PSMT.

The ADX (14) has developed an uptrend. Since all the indicators are sustaining in their bullish zones, we can interpret the bullish consolidation as a bullish flag & pennant -- a continuation pattern in Figure 1. The formation is ready to break upward and resume the previous rally. The breakout point at 80 levels will be the best place to go long. The bullish breakout is confirmed as the stock is sustaining above 80 levels, and hence, traders can trigger a long position at the current levels. The potential target for PSMT is huge; 75 - 15 = 60 + 80 =140. Thus, long-term traders and investors can definitely trade this stock.

FIGURE 2: PSMT, DAILY. The stock has formed an ascending channel.
Graphic provided by: StockCharts.com.
 
On the daily chart in Figure 2, PSMT is forming a short-term ascending channel. The stock is comfortably moving within the channel, making a new high. However, the RSI (14) has been reluctant to cross the 70 levels. The oscillator has failed to breach the 70 levels, indicating lack of bullish strength. Although the stock is surging, a bullish breakout of the channel is not possible in such a scenario. The stock has to accumulate robust strength to undergo the breakout. The uptrend is steadily developing and the MACD is marginally positive. The trigger line of the MACD (12,26,9) is frequently challenged, signifying an unstable momentum and volatility in the rally. Therefore, the stock is likely to move within the channel.

Once the essential bullish strength is gathered, PSMT would be a ggood stock for short-term traders to trade as well. Due to the restricted price movement in Figure 2, the breakout rally of the flag & pennant pattern on the monthly chart (Figure 1) would be slow. Traders may want to consider adding PSMT to their watchlists.



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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