Indicator Signals This Stock’s Breakout Will be Huge
The current stock market is throwing a lot of surprises investors’ way, but one piece of market advice still rings true: Buy stocks that are already going up. Even in shaky markets, the leaders still tend to lead. And by simply following the trend, we can avoid having to pick tops and bottoms.
Although it is not one of the glamorous stocks we see in the headlines daily, Lithia Motors (NYSE: LAD) exhibits the same sort of leadership qualities, and that shows an innate demand for its shares.
One of the largest automotive retailers in the United States, Lithia’s stock has handily outperformed the market. While the S&P 500 was trapped in a trading range for the first six months of the year, LAD gained roughly 40%. And now that the market seems to be backing down after six strong weeks, Lithia is holding tight to resistance near its all-time highs.
On the chart, the stock has formed a variation of a “W” pattern with two intermediate rallies instead of one between two larger rallies. Normally, such patterns — also called double- or triple-bottoms — appear after declines. However, they can appear after rallies as consolidation zones that allow a stock to rest before its next attempt to push to new high ground.
The pattern’s rules should be familiar to most chart watchers. The longer the stock holds near resistance at the top of the pattern, the more likely it is to break out to the upside. In contrast, weak stocks — ones that have run out of power — will typically touch resistance and fall away quickly.
This works in reverse at support. Strong stocks do not sit on support levels for long, and Lithia exploded to the upside on heavy volume the last time it touched the bottom of the pattern. That was also the day the company announced better-than-expected earnings and revenues and boosted its full-year guidance.
Currently, the stock is above all of its important moving averages from the 10-day up to the 200-day. A rising trend in every time frame puts the wind at its back. Additionally, momentum is strong without being overbought and cumulative volume is rising.
There is one more reason to be very bullish on Lithia Motors: It has an Alpha Score of 180.
If you’re not familiar with the Alpha Score, it is a proprietary indicator developed by Profitable Trading. It is based on strict relative strength and free cash flow criteria. In other words, it combines technical strength with a relatively fudge-proof fundamental indicator.
The highest a stock can score is 200, so LAD’s score puts it in the very top of all stocks on the market. Stocks with scores this high have gone on to deliver gains of 57%, 60%, 89% and 115%.
In fact, the indicator tagged many of the best-performing stocks of 2014 and 2015. And it just found 10 more “buys” for 2016. If you’re interested in learning more about this powerful indicator and how to access the “Top 10 Trades for 2016,” follow this link.
The buy signal for LAD will be a close above resistance at $122. If we employ the standard measuring technique of projecting the pattern’s height up from the breakout point, we get a target of roughly $142.
While LAD is near all-time highs, it has the look of a strong stock at rest instead of a tired one ready to retreat. If and when it breaks out, it should have enough power to push higher even in a shakier broader market.
Recommended Trade Setup:
— Buy LAD on a close above $122
— Set stop-loss at $115
— Set initial price target at $142 for a potential 16% gain in five weeks