During a strong trend, many traders wait for a big pullback to enter because it feels like a "better deal." Unfortunately, during a strong trend, these deeper pullbacks may not occur (or not frequently enough for active traders). Instead, a more sideways consolidation often develops. These four stocks are currently in relatively small consolidations, so a breakout to the upside signals the trend is continuing. Typically these trades can be initiated with relatively low risk and with price targets quickly achieved.
Halliburton (NYSE:HAL) is in a long-term uptrend and has had another nice run higher since the start of February. The price is currently consolidating, beyond the former 52-week high, between $59.69 and $57.36. If the price breaks higher, it indicates this current up-leg is continuing. Target is $62 to $62.40. A drop back below $57.36 warns of short-term selling pressure. A drop below $54.57 signals a larger correction into trendline support near $52--a region longer-term traders may wish to monitor for buying opportunities.
Dolby Laboratories (NYSE:DLB) had a near-vertical rally in early March, but has moved sideways since March 10. The high of the consolidation is $45.16, and the low is $43.27. The stock did something similar in January and February, moving within a range, with a number of false breakouts. Therefore, waiting for a daily close outside the range may help avoid the false breakouts. The trend is up, so a long could also be initiated anywhere in the range, with a stop below $43.20 and the expectation of a breakout higher. Upside target is $47.10 to $47.60.
CBOE Holdings (Nasdaq:CBOE) has formed a small triangle pattern off the 52-week high at $59.28. A break above $57.60 could spark enough buying interest to kick start another price wave higher. Target is $60.50 to $61.10. Recent lows at $55.32 provide support for the triangle, so place a stop below. If the triangle breaks to the downside, more short-term selling could be forth coning. Trendline support is near $52, providing another area to watch for buying opportunities.
Tyco Connectivity (NYSE:TEL) has been trending very strong for the last year and half, and is currently trading just below the 52-week high of $61.14. A breakout of a small correction channel may provide advance warning of a run at the high, and potentially beyond. If price moves above $60, another re-test of $61.14 is anticipated. There is minor resistance at $60.40, so the price will need to also climb through that. If the price advances beyond the 52-week high, the next target is $62.50. Once the breakout occurs, a stop can be placed below $59.
The Bottom Line
Consolidations during strong trends provide opportunities to get in on swing trades. This is because, when the consolidation breaks, it provides evidence of the near-term direction of the stock. Risk can be managed by using a stop loss order, placed below the consolidation (in the case of an upside breakout) or inside the consolidation if the breakout is strong and therefore less likely to pull back into the consolidation. The latter increases the reward relative to risk on the trade, but has a slightly higher chance of being prematurely stopped out. By controlling risk and position size, a losing trade shouldn't have a significant negative impact on overall trading capital.
Charts courtesy of Stockcharts.com
Disclosure - At the time of writing, the author did not own shares of any company mentioned in this article.