Tight Consolidation Breakouts To Watch

By Cory Mitchell | September 04, 2014 AAA

The S&P 500 has been consolidating for the last week following a strong run higher commencing in mid-August. The consolidation comes near the top of the trend channel, but a break above the consolidation indicates the potential for another surge. Given that the index is exhibiting this characteristic, many other stocks are as well. Here are four stocks to monitor for near-term consolidation breakouts. (For more, see: Four Trend Channel Trades.)

AECOM Technology Corp. (ACM) moved very strongly to the upside in early July and again in early August. Following the more than 15% surge from the August low, the price has been consolidating below $38.24 for several trading sessions. A break above this level indicates another advance, targeting the $41 region. A stop-loss can be placed below the consolidation low at the time of the breakout. The consolidation low is currently $37.24, but may change before the breakout occurs. Given the strong uptrend, even if the price breaks lower, taking short trades isn't recommended. (For more, see: Consolidations Leading To Upside Breakouts?)

Akorn Inc. (AKRX) was trading as low as $20.52 in April, but has been surging since, up to a recent high of $39.48. Over the last several sessions the price has consolidated between $39.48 and $38.46. Since the trend is so strongly up, a short trade if the price drops below the consolidation isn't advised. If the stock breaks above $39.50 though another upside move is likely underway targeting $44. A stop-loss can be placed below the consolidation low if trading the breakout. (For more, see: 4 Stocks Awaiting Strong Breakouts.)

The Allstate Corp. (ALL) is up nearly 10% from the July low of $56.63, and currently consolidating below the $62.09 high (unadjusted). Minor support for the consolidation is at $61, although with the strong uptrend, placing a downside breakout trade isn't advised. A move above $62.09 on the other hand triggers a trade with a target between $64.50 and $65. Stop-loss order goes below $61. (For related reading, see: These Stocks Are Close To Triangle Breakouts.)

Actavis PLC (ACT) is moving within a big triangle pattern, and is consolidating near the $230 resistance region of that pattern. Given the proximity to resistance an upside or downside consolidation breakout is tradable in this case. The consolidation high is $229.61, and the high of the triangle is $300.77. A break above either of these levels is a trade trigger, with a stop placed below the consolidation low at $224.81. Upside target is $240, with a long-term target at $270 (based on triangle height). If the price breaks the consolidation to the downside, resistance will have held, and a short trade can be taken with a stop above $300 and a target down near $210. (For more, see: Triangles: A Short Study In Continuation Patterns.)

The Bottom Line

The consolidations represent potential trading opportunities for short-term traders. Ideally, only trade breakouts in the direction of the overall trend, unless there is evidence to suggest that the consolidation could be a topping pattern if the price breaks lower. The only stock in this list which fits the latter scenario is Actavis, offering a potential short trade if the price breaks lower due to the "multiple top" formation. Trade with a stop-loss to keep risk under control. And since a trend change can occur at any time, only risk a small percentage of trading capital on any trade(s) taken. (For more, see: Stocks Poised for a Breakout or Multiple Top?)

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