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BREAKOUTS


BTU Breakout

10/19/12 09:34:15 AM
by Chaitali Mohile

Peabody Energy Corp. is likely to undergo a major trend reversal breakout.

Security:   BTU
Position:   Buy

Peabody Energy Corp (BTU) entered a long-term downtrend in early 2011. The stock declined, forming a descending channel on the weekly time frame chart in Figure 1. After breaching the 200-day moving average (MA) support, BTU entered into a serious correction. The bears strengthened as the channel moved south. We can see large red (bearish) candles in the descending channel. All the upward price actions initiated with the support of the lower trendline were very weak. Those price movements formed either smaller bullish candles or large doji candlesticks. This highlights bearish pressure in the rally. Eventually, the 50-day moving average (MA) slipped below the 200-day MA, forming a bearish moving average crossover in Figure 1.

The selling pressure indicated by the negative directional index (-DI) remained stronger throughout the rally. As a result, the downtrend indicated by the average directional index (ADX) (14) sustained above the 25 levels. The full stochastic (14,3,3) has been oversold for almost a year and a half. This bearish momentum steadily dragged the price rally downward.

FIGURE 1: BTU, WEEKLY
Graphic provided by: StockCharts.com.
 
However, the indicators are likely to reverse. BTU is trying to violate the upper trendline resistance. The highly oversold oscillator has surged above the center line, entering a healthy overbought region. The ADX (14) has formed a rounded top in a well-developed trend region. If buying pressure (green line) improves drastically and surges above -DI, a fresh uptrend would develop for BTU. Although the +DI and -DI had converged earlier as well, BTU failed to develop a new uptrend. Apart from the indicator signals, the price rally should sustain above the newly formed upper trendline support. Gradually, BTU has to breach its 50-day MA resistance for the confirmed bullish breakout.

FIGURE 2: BTU, MONTHLY
Graphic provided by: StockCharts.com.
 
In 2009, the stock geared up an upward rally from 20 levels, forming a robust support zone. According to Figure 2, BTU has recently hit this support level, and hence, the descending channel is likely to halt. The ADX (14) is showing the developed downtrend, but the oversold stochastic is ready to climb above 20 levels. Earlier, the oversold oscillator has recovered rapidly, giving birth to the fresh upward price rally. Similarly, it can generate a fresh bullish momentum and encourage a major bullish breakout of the descending channel. Once the breakout is confirmed, $28 would be an ideal price to trigger long positions.

To conclude, the long-term descending channel and the downtrend of BTU are ready to undergo a bullish reversal rally.



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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