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Eastman Chemical Company (NYSE: EMN) staged a major rally off the 2009 lows along with the broader market. There were a few hiccups along the way, but EMN spent most of the past four years trudging higher.
Then, early this year, the diversified specialty chemicals company ran into a meaningful wall of resistance. Since hitting its all-time high above $75 in mid-February, EMN has retested the resistance level six times. Chances are now high that the stock will break through this wall and power higher.
Before digging into EMN's charts, allow me to say a few words about the broader market's structure as it relates to the trade setup I am seeing in this stock.
It's no big surprise that neither the bond nor commodity markets are offering investors enticing enough returns to park their money there. As central bankers around the globe united, and through a series of monetary stimulus programs essentially forced investors into equities, the gap in performance between stocks and most other asset classes seriously widened.
The longer the stock market rally continues, the more investors will plough money into lower-quality stocks and chase anything with (and eventually anything without) momentum higher in a vertical fashion.
While I have no qualms with the fundamentals of EMN, from a technical perspective I consider it to be a classic case of a stock that investors are forced to chase higher, especially once it breaks past this medium-term resistance area.
So, not only do EMN's technicals line up, as we will see in a minute, but the wind is to its back as investors are forced into the stock market. Now, to the charts we go.
The weekly chart clearly outlines the orderly fashion in which EMN pushed to higher highs since the 2008 top. After breaking past the 2008 highs in the autumn of 2010, the stock continued to race to a spring 2011 high before retracing all the way back down to the breakout line from 2010.
This powerful retest then forced the stock higher toward the 2011 high, where after a breather, EMN began a long rally toward the February 2013 top.
As technical analysis has much to do with geometry and symmetry, I would be remiss not to point out the symmetrical path the stock took from the 2009 lows all the way up to the recent highs. This speaks to a stock that should, at least from a technical point of view, make institutional investors somewhat more at ease when building positions.
On the daily chart, the symmetrical ascent continues, although in smaller waves given the shorter time frame. After EMN broke past its February-August 2012 resistance area, the roughly 40% rally ensued for six months before coming to a halt in February 2013.
Since then, the stock has continually bumped into the resistance zone between the $74 and $75 marks. After hitting it six times this year, EMN finally looks to have enough momentum to break through this wall of resistance. While the breakout could be a bit bumpy, once things get going we should see some good acceleration in the stock.
Recommended Trade Setup:
-- Buy EMN on a daily close at or above $74-- Set stop-loss at $72-- Set price target at $79 for a potential 7% gain in 3-6 weeks
While the sector is hanging on by a thread, shares of this company have already started breaking down.
A number of technical failures point to a great opportunity for short sellers to profit.
Goldman's bearish outlook tells me that value is going to be an important quality when assessing stocks for the next few years.