SORL Auto Parts, Inc. (SORL) shares rose more than 20% on Tuesday after the company posted strong first quarter financial results, but the stock closed only about 6% higher by the end of the session after traders took profits off the table. Revenue rose 44.1% to $107.73 million, and earnings per share came in at $0.43, which were stronger results than the market had been expecting.

Zhejiang, China-based SORL makes and distributes automotive air brake valves and hydraulic brake valves primarily for China's commercial vehicles market. 

The strong earnings came after a rough fourth quarter, when management suggested that higher distribution expenses would cut into profitability. During that quarter, selling and distribution expenses rose 350 basis points to 13.2% of sales due to higher freight, packaging and compensation costs. The good news is that the first quarter showed only a slight drop in gross margins, which suggests that the situation is stabilizing this year. (For more, see: The Industry Handbook: Automobiles.)

Technical chart showing the performance of SORL Auto Parts, Inc. (SORL) stock

From a technical standpoint, the stock broke out from the 50- and 200-day moving averages to briefly close the gap made back in early April. The relative strength index  (RSI) rose to overbought levels at 66.98, while the moving average convergence divergence (MACD) experienced a bullish crossover in late April and could break through the zero line. These indicators suggest that the uptrend could see some near-term profit-taking activity.

[Check out Chapter 4 of the Technical Analysis course on the Investopedia Academy to learn more about supplemental technical indicators like the RSI and the MACD]

Traders should watch for a breakout from upper trendline resistance at around $6.75 to retest March highs of just over $7.00 on the upside. If the stock fails to break out, traders should watch for a move lower to break below the 50- and/or 200-day moving average to lower trendline support at around $5.00. A breakdown from those levels could lead to a move down to the pivot point at $4.61 or prior lows at around $4.00. (See also: What types of companies are in the automotive sector besides auto manufacturers?)

Chart courtesy of StockCharts.com. The author holds no position in the stock(s) mentioned except through passively managed index funds.

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