As the stock market bounces higher after a two month decline, indicated by an ETF such as the S&P 500 SPDR (ARCA:SPY), a handful of big name stocks have been accelerating to the upside. These stocks have been within trend channels, uniformly rising, but recently have broken the trend channel to the upside. Such a breakout usually signals two potential outcomes - an acceleration of the trend already in place, or the last bit of euphoric buying exhausts the trends and sends the stock lower. Quite often, both of these scenarios occur.
The trend channel in Altria Group (NYSE:MO) stock can trace its roots all the way back to early 2009. Since that time, the stock has been moving back and forth within the channel, but broke out on June 29. This breakout created a new 52-week high in the stock at $35.05 and also marks either an acceleration of the trend, or a final push higher before a decline. Of note is that volume has been declining in recent months, compared to volume seen during 2011 and the rise in early 2012. With declining volume, it will be hard for the stock to continue higher, although at this time there is no direct indication of a reversal. If the stock drops back into the trend channel - support is at $33.50 - over the next couple months it is likely to move toward the lower portion of the trend channel ($27). Trade with the trend which is higher at the moment, because once a stock starts accelerating it can move significant distances in a short time.Watch for signs of a reversal though as the breakout, especially if not accompanied by volume, means a reversal could also be close at hand as the buyers exhaust themselves.
Colgate-Palmolive (NYSE:CL) has been in an uptrend since early 2009, but throughout 2012 has been trading within a precise trend channel. July 3 marked a fresh 52-week high in the stock at $105.16, and also put the price right at trend channel resistance. Therefore, this stock is very close to a breakout, but it hasn't occurred yet. If the stock retreats from current levels, it is likely to test trend channel support, currently intersecting near $100. On the other hand, if the push continues, the trend will be accelerating and could see $110 or higher in fairly short order. Volume has once again been dropping though compared to 2011 levels. The long side can be traded as the trend is still higher, but if the breakout occurs and is followed by a move back into the trend channel, the buying could be over.
Biogen Indec (Nasdaq:BIIB) began a steep ascent in mid-2011 and has not looked back. Throughout 2012, the stock has been moving within a trend channel higher and is once again breaking to the upside. The 52-week high at $145.67, put in on June 3, is beyond trend channel resistance at $143.50. There is a also support at $138.26; a drop below this level signals a move toward the bottom of the trend channel - currently at $130. The trend is aggressively higher in this stock, and currently there is no imminent sign of a reversal. An acceleration to the upside provides profit potential, but is not without risks. As the trend accelerates buyers can quickly becomes exhausted and a sharp reversal can ensue.
American Tower Corporation (NYSE:AMT) has been in a rising trend channel going back to the summer of 2011, and has been in an overall uptrend since late 2008. June was a great month for the stock as it rallied from a low of $62.54 to a fresh 52-week high on July 3 of $71.87 - a 14% jump. This move higher has resulted in the upper band of the trend channel, at $70, being penetrated. A drop back below $70 puts the stock back within the channel, and a further decline below support at $67 indicates a reversal and a move toward trend channel support at $64. Trade the long side, with the dominant trend, until a drop below support indicates the buying may be over.
The Bottom Line
When a stock breaks out of a rising trend channel, it signals an acceleration in the buying. The former channel then becomes the reference point. Following a breakout, if the stock moves back into the channel, the buying is likely finished and the stock will move toward the lower end of the channel. The upside moves present opportunity as the accelerated buying can mean significant moves in a short amount of a time. Caution is warranted on both sides though - long and short. In such an environment the rewards can be big, but shorts will fighting the longer the longer-term trend, and longs are buying during a euphoric period, where if buying dries the reversal can be sharp and fast.
At the time of writing, Cory Mitchell did not own shares in any of the companies mentioned in this article.