Fallen IPO Star Ready to Shine Again

Fast food purveyor Shake Shack (NYSE: SHAK) burst onto the trading scene last January with a hotter-than-hot initial public offering. SHAK soared from its $21 offering to $45.90 by the close on its first day of trading. And just four months later, the stock traded above $96.

Unfortunately, such a rally is rarely sustainable, and 13 weeks after breaking $96, it was back below $50. From there, SHAK gradually tumbled to a low of $30 this January.

Although we couldn’t have known it at the time, SHAK stock was actually starting to turn things around in early 2016. After a failed attempt at recovery in February, it settled into a rather well-defined trading range in March. Last week, when rumors of a potential buyout by burger giant McDonald’s (NYSE: MCD) began to surface, Shake Shack finally poked its head above that range.

Unfortunately, SHAK failed to break meaningfully above that trading range; however, the stock continued to test the upper boundaries. The stock hovered around the top of the range for several days and showed a little more moxie on July 19. Perhaps McDonald’s own gain on news of a Pokémon deal in Japan pushed Shake Shack speculators into action, thinking MCD would have more cash to invest. But that’s pure guesswork and far less important than what the technical picture is telling us.

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Technically, the stock is trading in a week-long range at the top of the aforementioned range that began in March. A breakout though the smaller range at $39.20 would also break the larger range and set up a fairly beefy upside run. Measuring the size of the larger range and using that to project upward, a move to $44 seems likely. At this price level, that would equate to a 12% gain.

Of course, just because a stock is trading at resistance doesn’t necessarily mean it will be able to break through. If we’re searching for evidence of a mounting breakout, there’s no better place to look than the on-balance volume (OBV) indicator.

OBV keeps a running tab of volume trading on up days and subtracts volume on down days. When the bulls are more aggressive, demand wins, money flows into the stock and OBV rises. Despite sideways price action most of this year, on-balance volume (OBV) has been rising somewhat steadily, even before the McDonald’s rumor surfaced.

If and when prices do move above the short-term range, they will also move above the 200-day moving average for the first time ever. (By the time SHAK was 200 days old, it was already five months into its big decline.)

Therefore, the stage is set for a technical breakout. Just be aware that an explicit denial of the takeover rumor by McDonald’s could slam the stock. But the stock has held its ground for a week since the rumors surfaced, and I take that as a positive.

Recommended Trade Setup:

— Buy SHAK at $39.25
— Set stop-loss at $37.50
— Set initial price target at $44 for a potential 12% gain in seven weeks

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