The price action in these stocks has been compressed in recent months, repeatedly testing support and resistance levels. As the price action becomes more and more constricted, a breakout inevitably follows. The four stocks are all nearing such a breakout point.
Occidental Petroleum (NYSE:OXY) has been pushing at $98 since February, but can't close above it (unadjusted). The swing lows since March are creeping up though, creating a narrowing range. A daily close above $98 breaks the consolidation and sets targets of $103 and $105. Once the breakout occurs a stop-loss is placed below the recent swing low (currently unknown), most likely in the $95 region. If the price drops below the May low at $93.80, look for continuation to the downside. The target is $89 to $88, as this is where longer-term traders could step in to offer buying support. Ideally a stop-loss for the short-trade is placed within the pattern above a recent swing high (currently unknown), most likely in the $97 region.
Fluor (NYSE:FLR) is in a descending triangle which had offered support above $73.32 (low of the pattern) on numerous occasions in 2014. On May 16 the price closed below that level, indicating a downside breakout. The triangle is approximately $10 in height (rounded down); subtract $10 from the breakout price of $73.32 to attain a target of $63.32, or $64 to be conservative. Stop loss is initially placed above $77.81, but moved lower once a lower swing high forms. If the downside breakout fails, look for an upside breakout above $77.81. Target for the upside breakout is $88, with an initial stop below $73.
Flextronics International (Nasdaq:FLEX) is pushing at the top of a rising channel. Since the top of the channel is progressively getting higher an exact breakout price is harder to pinpoint. For this type of pattern, let the pattern breakout and move to at least $10 or higher, then buy a pullback near $9.85 with a stop below $9.25. The target is $10.75, but based on the resistance which will be broker if this occurs the price could continue to trend higher. If the price fails to break higher, a move below $8.82 could push the price to support at $7.75 to $7.25. For the downside breakout, place an initial stop above $9.25 and reduce it as lower swing highs form.
Urban Outfitters (Nasdaq:URBN) has lacked a trend since the latter part of 2012, but since late 2013 the price action has become even more constricted. A downside breakout is more compelling than an upside breakout because of the lack of support below the consolidation. A daily close below $33.95, especially on larger than average volume, should end the deadlock and send the price to $28. Initial stop is placed above $37 and dropped as lower swing highs form.
The Bottom Line
When price action becomes constricted it will eventually breakout. In hindsight, breakouts look easy to trade, but the main drawback of breakouts is that we don't know when they will occur. False breakouts are a reality of breakout trading. With any breakout trade, make sure the expected reward exceeds the risk (target versus stop-loss), in this way, even if half the breakouts trades end up losing money, the winners will more than cover those losses. Keep position sizes to such a level that a single loss doesn't significantly draw down the account; risking 1% or less per trade is recommended.