This Food Stock is Poised for a Big Breakout
Even though a few big technology stocks seem to dominate the news, the real place to be lately is the consumer staples and consumer discretionary sectors. Both have outperformed the market for months, even as stocks swooned across the board in late August.
The major indices are facing stiff resistance as they approach their early 2015 trading ranges. For that reason, I favor the consumer staples group. It tends to hold up better than consumer discretionary in times of turmoil. When money gets tight, consumers are still going to buy food and medicine but will probably put off that flat screen TV purchase.
There is also an argument for consumer staples based on the Federal Reserve. It seems unlikely the Fed will raise short-term interest rates this year, and that may have helped fuel the market’s rally since late September.
Eventually, though, rates will start to climb. This will leave the market vulnerable to a sell-off, making the relative stability of consumer staples more attractive. And if the Fed does raise rates in December, that argument would be made even stronger.
The question is: Which consumer staples stock looks strong but still has some room left to rally?
Food stock General Mills (NYSE: GIS) fits that bill.
The first thing to notice on the chart is that it is somewhat choppy in its rising trend. GIS has flirted with its 50-day moving average all year — usually trading above but trading below since August. Normally, this would be considered a bearish setup, but numerous technicals argue the contrary.
First, GIS continues to trade above its 200-day moving average. The 50-day and 200-day averages are now squeezing price action, which itself is moving in a tightening range.
Next, on-balance volume moved sideways from March to August, but right after the market’s mini crash on Aug. 24, it suddenly woke up. Money started to flow into the stock at a fast clip.
On-balance volume keeps a running total of volume trading on up days minus volume on down days. If a stock is bullish it should see more volume changing hands on rallies, suggesting demand. If prices are moving sideways as on-balance volume is rising, then we can assume the stock is under accumulation ahead of an upside breakout attempt.
We want to wait for the actual breakout from the coiling pattern to let the stock prove it is ready to rally. The upper border of the pattern is at $57. However, for a little extra safety, I’d like to see GIS take out horizontal resistance from a pair of highs made earlier in October near $57.25.
Based on the size of the coil, the first upside target would be above the July highs near $60. However, I do not think GIS will stop there based on the size of the bullish trend already in force. The second integral multiple of the coil’s height projected upward would be near $63. This is also confirmed by a single box reversal point-and-figure chart, which targets $64.
The stop should be set under the coil at $55 where the long-term trendline from 2012 now resides.
Recommended Trade Setup:
— Buy GIS at $57.25
— Set stop-loss at $55.50
— Set initial price target at $63 for a potential 10% gain in eight weeks
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