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A recent breakout sets shares up for a rally to last year's highs and possibly beyond.
As the broader market moves sideways in a fairly tight range, we must dig a little deeper for opportunities. After all, quiet markets let the underlying conditions develop away from prying eyes.
And as the market awaits Friday's speech by Federal Reserve Chief Janet Yellen -- where everyone hopes to get a clue as to when interest rates will finally be raised -- the auto sector is showing some quiet strength. We are seeing short-term rallies in automakers, parts suppliers and tire makers.
Today's trade, Lear Corp. (NYSE: LEA), a manufacturer of automotive seat systems and electronic modules, has been trading mostly sideways but with a rather dramatic inflow of money for the past two months.
The majority of fundamental analysts following Lear rate it a buy or strong buy, with none rating it a sell. And even a chart watcher can appreciate a forward price-to-earnings (P/E) ratio below 9. However, it is the chart itself that offers the most compelling reason to buy LEA.
In June, the stock took a big hit along with many of its peers, dropping 15% in two days' time. But it's been mostly up since then. More importantly, the technical indicator called on-balance or cumulative volume started to climb in June and has not slowed, even as the stock's advance seemed to.
On-balance volume, which keeps a running total of volume traded on up days minus volume on down days, is above the levels seen in December when LEA was trading in the mid-$120s. This is a sign of strong demand for the stock and indicative of accumulation by smart money investors.
Aside from on-balance volume, the stochastics momentum indicator suggests the bulls are preparing for a charge. This indicator measures where a stock is with regard to its recent range. The theory is that stochastics will oscillate between high and low levels when the stock is moving sideways. If the stock is gathering strength, the indicator tends not to move all the way to the lower levels as closes start to occur higher within each day's range.
The explanation is simple. When traders feel more bullish, they don't mind holding positions overnight. They also don't sell as aggressively on down days and possibly even do some bargain hunting near the close. And they chase prices higher on up days, pushing the close up near the high for the day.
For Lear, that is what seems to be happening. The early August dip looked frightening on bar charts but, on average, the stock still managed to close above the middle of the daily range.
That leads to a technical buy pattern called a "stochastic pop." When a stock is trendless but shows high stochastics in both daily and weekly time frames, it tells us that it is ready to rally. Currently, Lear shows strong daily stochastics and arguably strong enough weekly stochastics.
While resistance is not clear on bar charts, in daily close charts, the downward sloping line connecting the May, June and July peaks, and arguably extending back to the December highs, has already been broken to the upside.
The move above the trendline also broke a year-long descending triangle to the upside, which could potentially result in a run to the $140 level. But for our purposes, we'll set the initial target at last year's highs for a quick gain.
Recommended Trade Setup:
-- Buy LEA at the market price
-- Set stop-loss at $111
-- Set initial price target at $126 for a potential 8% gain in four weeks
Note: A millionaire trader has agreed to share his secret for turning moves like I'm expecting in LEA into 2,201% annualized gains while risking less money than buy-and-hold investors. Find out what it is here.
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