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BREAKOUTS


Cabela's Inc. Ready For A Breakout

07/19/12 12:04:40 PM
by Chaitali Mohile

Cabela is a stock to watch. The potential bullish breakout is likely to attract many traders.

Security:   CAB
Position:   Buy

Cabela's Inc. (CAB) is following the ascending movement of the 50-day moving average (MA) on the weekly chart in Figure 1. The chart shows that CAB has been forming a bowl pattern before initiating a bullish breakout rally. The two green blocks shows those bowls formed with the 50-day MA support. A bullish moving average crossover in September 2010 began an upward rally. It strengthened an uptrend, which was declining earlier. Thereafter, the average directional index (ADX) (14) once again surged above 20 levels, developing the uptrend.

However, the relative strength index (RSI) (14) was reluctant to climb into an overbought area at 60 levels. The full stochastic (14,3,3) was fluctuating in a wide range between 30 and 70. The weak momentum and lack of bullish strength reflected volatility in the upward rally. As a result, CAB retraced to challenge the 50-day MA support after even the smallest upward move. We can see in Figure 1 that the ascending price action of CAB is followed by either a consolidated move or a declining rally. Due to these technical conditions, the stock formed two bowls with the support of the 50-day MA.

FIGURE 1: CAB, WEEKLY
Graphic provided by: StockCharts.com.
 
Currently, the third bowl formation has been completed above the moving average support. The right-side rally of the bowl has reached the previous high resistance at $40.42. The bullish stochastic oscillator is sharply moving north, showing a potential breakout. The RSI (14) is comfortably moving within the ascending channel, signifying bullish strength in the new rally. In addition, the ADX (14) shows a developing uptrend.

Earlier, both bowls initiated a bullish breakout rally. Considering all the possibilities in Figure 1, CAB is likely to break the previous high resistance, resuming its existing bullish journey. This could be the best buying opportunity for traders and investors.

The red and green lines marked in Figure 2 are the support-resistance line of CAB. After looking at the big picture, we can see an inverted head & shoulders (long-term) pattern that has already breached upward. The momentum oscillator is zigzagging between the 50 and 80 levels (a healthy overbought zone). The RSI (14) is ascending in the bullish area, and the ADX (14) is well developed but is moving closer to the overheated levels.

FIGURE 2: CAB, MONTHLY
Graphic provided by: StockCharts.com.
 
Since the stochastic is overbought and the uptrend is nearing the 40 levels, the breakout rally is likely to slow down. However, traders can stay long for the next few months. CAB would readily surge to new highs till there is some stability in the uptrend. Later, the oscillator and trend indicators movement should be watched carefully because they are likely to signal reversal possibilities. In that case, CAB may undergo a reversal rally in the form of either a consolidation or marginal descending rally.

CAB could remain an attractive stock for the long-term as well. To conclude, the new breakout at $40.42 levels would attract many new short-term traders.




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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