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If you listen to the market -- and you should always listen to the market -- then you must recognize and accept the changes in the post-election world. The market is telling us, "Out with old, in with the new."
The "old" are sectors like technology, utilities and other big dividend-paying groups. The "new" are infrastructure, drugs, defense, financials and select consumer discretionary stocks.
Within the consumer discretionary sector, I want to focus on the restaurant group, which has been rallying since Donald Trump was declared president-elect.
Pundits are attributing this strength to hopes of an overhaul of the Affordable Care Act. Specifically, these companies like the possibility that the employer mandate to provide health insurance to employees will be removed. They are also relieved that the new administration would seek a lower increase in the minimum wage.
Clearly, both of these things would be good news for restaurants' bottom lines. With the exception of the pizza category, most restaurant stocks have had a rough year, as they faced falling sales and profits. But the future now appears much brighter for the group.
Of course, that doesn't mean all restaurant stocks are good buys right here and now. And investors certainly face risk buying into the sector after such a frenzied rally.
That's why it pays to look at the bigger picture, and my top restaurant pick, Wendy's (NASDAQ: WEN), offers a great long-term chart.
Shares of the fast-food chain not only rallied sharply after the election, but the rally sparked a long-term breakout.
Since early 2015, WEN traced out a large symmetrical triangle or pennant pattern, as major highs got lower and major lows got higher.
After a long rally, such a pattern represents a period of rest and often indecision as both bulls and bears reassess their positions. Swings within the pattern get smaller, and everyone waits for a reason for the stock to punch through its upper or lower border.
In this case, the spark was the presumed change in the operating environment for restaurants and other small businesses following the election. However, from a charting point of view, the reason doesn't matter. What's important is that the stock paused at the upper border and then in no uncertain terms broke out to the upside on very heavy volume.
WEN does show some overbought short-term technicals, including momentum and the distance shares have traveled above their three-month trendline and key 50-day moving average. This suggests it may be more prudent to let the post-election euphoria die down a bit and attempt to buy the stock at a slightly lower price.
Instead of simply waiting for a pullback, you can collect income instantly without purchasing shares. In exchange for this income, you will be obligated to buy shares if they fall to a specified level. But since that was the plan anyway, you might as well be getting paid to wait. If you're interested in this strategy, go here.
As long as WEN doesn't drop back below its pre-election levels, the breakout will remain in force and the odds of a continued advance are very high.
In summary, we have a leading stock in a group that seems to be one of the new leaders in the post-election market. WEN scored a long-term technical breakout but is overbought in the short term. So we should look to buy the dip as long as the breakout is not negated, and hold on for the ride.
Chart resistance doesn't appear until the $14 level, which was the final pullback low ahead of the blow-off top seen in 2006. The triangle pattern also suggests a measured upside target just above $14.
I'm going to be more conservative, though, and set our target at $13.75, which should still result in a return of more than 20% over the next few months.
Recommended Trade Setup:
-- Buy WEN on a pullback to $11.25 (or find out how to get paid to wait for one)
-- Set stop-loss at $10.75
-- Set initial price target at $13.75 for a potential 22% gain in five months
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