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NEW HIGHS-NEW LOWS


ROST Blasting To A New 52-Week High

01/06/12 09:27:30 AM
by Donald W. Pendergast, Jr.

When stocks blast to a new 52-week high on wide range and heavy volume, there's probably a good reason. Ross Stores is an example.

Security:   ROST
Position:   Accumulate

Ross Stores, Inc., shares (ROST) have made yet another in a series of 52-week highs, this time with a massive consolidation breakout move on big range and volume. Will the new calendar year bring ever-higher valuations in the stock, or is the breakout more of a last-gasp fakeout before a nasty tumble? See Figure 1.

FIGURE 1: LARGE-CAP STOCKS. A list of 21 large-cap stocks that reached new multimonth highs on January 5, 2012.
Graphic provided by: MetaStock.
Graphic provided by: MetaStock Explorer.
 
A number of large caps shot to impressive 52-week highs on January 5; stocks from the retail, banking, construction/housing, pharma, and service industry groups were all represented, but the clear standout was Ross Stores (ROST). The stock leaped higher by 5.8% on the session, bursting out of a month-long consolidation pattern in a big way.

With a solid earnings growth projections for the next few quarters and a better-than-nothing dividend yield of 0.9%, it's not hard to understand why traders and investors are eager to jump on the ROST train. The stock is in a steady uptrend, with its 50-period exponential moving average (EMA) also trending higher -- a clear confirmation of a strong intermediate-term trend in motion.

Long-term money flow (based on the 100-period Chaikin money flow [CMF] [100] histogram) is incredibly bullish, too, which is very comforting in a mega-breakout situation like this one. Had the money flow been in a waning trend or (even worse) stuck in the mire below its zero line, the breakout buy opportunity would have been that much less attractive. Finally, ROST also boasts better relative strength performance than the .SPX over the last calendar quarter, which is also very positive for those wishing to latch on to this rising retail rocket. See Figure 2.

FIGURE 2: ROST, DAILY. From a technical standpoint, there isn't much not to like here for a bull in shares of Ross Stores. Depending on how skilled a trader you are, there may be a number of ways to play this powerful breakout move.
Graphic provided by: MetaStock.
Graphic provided by: Deel New Highs screen from MetaStock 11.
 
Here are a few ways to play ROST here:

1. The covered-call route looks very attractive now, especially considering the mammoth momentum that has been driving the stock higher. A one- to two-month-out covered-call play might be the way to go for conservative ROST investors and traders.

2. Here's a scalp idea you may not have ever considered before. Consider buying ROST at the next session's open, holding on for a 1% daily profit target; the big idea here is that there is usually some follow-through on days right after a huge bullish breakout, and you want to try do a "smash 'n grab" to make a modest profit before the stock pulls back intraday. You need to buy on a rise above the breakout bar high, which is actually safer than waiting for a pullback (which may not arrive when you need it).

3. You could also sell a put option at a strike price below the low of either the breakout bar low or the recent consolidation pattern low. This is also a "grab the cheese and run" kind of play; the big idea here is to sell the put as the stock follows through (hopefully higher) and then buy it back at a substantially lower price as soon as possible, all the while letting time decay and the stock's powerful momentum help earn you some extra cash to help keep the lights on and the fireplace lit.

4. Of course, you could also put on a regular stock position, too. You need to be prepared to wait out an intraday drawdown if you buy on a rise above Thursday, January 5's high and the stock fails to cooperate in a timely manner. Running some sort of a two-, three-, or even a five-bar trailing stop of the daily lows might also be a way to manage such an entry, depending on how bullish you are.




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: lineartradingsys@gmail.com

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