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Tickers in this Article: MCD, SPG, TEN, CCI
Often the best trade setups occur after a healthy consolidation. A healthy base takes time to develop as market participants jockey back and forth as they build their positions. Bases that form too quickly or have wide ranges will often result in failed moves. Once a stock emerges from a healthy consolidation, the base will usually serve as a strong support or resistance level because that area is filled with other traders who missed the breakout and are anxious to avoid missing a second opportunity. Additionally, traders that were taking the opposite side of the trade will look to unwind their positions as close to breakeven as possible. Recently, there has been an increase in the number of stocks emerging from a healthy base and these stocks could provide a good trading opportunity on a pullback.

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McDonald's (NYSE:MCD) is a good example of a stock that recently emerged from a healthy base. MCD had a nice rally earlier this year and began a consolidation once the general markets started to correct in April. While the initial pullback looked sharp, MCD held support near $66 and continued to trade sideways for a few weeks. The base has become well defined over the past few months with the upper boundary holding near $71.60. Recently, MCD was able to clear this level as it traded to new all-time highs. Now that MCD has successfully cleared resistance, it should become support on a pullback. This would be the level for traders to watch in the immediate future for a possible low-risk trading opportunity.

Source: StockCharts.com


Simon Property Group (NYSE:SPG) is another stock that recently emerged from a healthy base. The base for SPG differs from MCD in that its upper boundary slants downward. While clearing the downtrend line is the first step in clearing the consolidation, ultimately the most important level is the highest point in the base, which in this case is just above $93. SPG first cleared the trendline in early August, and followed through to new highs a few days later. The level to watch moving forward on a pullback would be near $90, which coincides with the trendline break and the June highs.

Source: StockCharts.com


Tenneco (NYSE:TEN) is showing a base that looks a little choppy at first glance, but overall serves the purpose of consolidating its prior gains. While not shown on this chart, TEN has rallied from under $1 per share in late 2009 to its current price. The recent consolidation held above an important longer term level near $20, and this area should serve as a solid floor underneath the stock. The more important level in the near term is near $27, which has been acting as resistance over the past few months. TEN was able to clear this level recently, and is currently forming a flag pattern above the base. While TEN may not be ready to break out yet, the current action is bullish.

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While Crown Castle International Corporation (NYSE:CCI) recently cleared a base, the more important test will be the next few points higher. CCI has pulled back from the low $40s on several occasions over the past 10 years. In fact, CCI's all time high is $44.75. The more important level to watch in the near term would be to see if CCI can hold support near $40. If CCI slips back into its base, it could travel back down to the bottom of the range in the mid $30s.



Bottom Line
Each of these stocks recently cleared important levels, which is the first step toward emerging into a new trend. Usually, a stock will retrace from the initial breakout to test the breakout level. Some of these stocks have already begun to retrace, while others may need a weak market day to push them back to the breakout area. Each of these should be watched closely to see how they respond to any upcoming weakness. If buyers step in to support the stocks at their breakout levels, they could enter a new trend higher. If they fail, they may resume trading in a range and possibly head back for a test of the bottom of their bases. In either case, traders need to show patience as they observe price action at this critical area.

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At the time of writing, Joey Fundora did not own shares in any of the companies mentioned in this article.

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