These stocks can extend their uptrend

The S&P 500 has broken out to new lifetime highs and has closed above the critical psychological resistance level of 2500, albeit marginally. Nevertheless, the index is likely to gain momentum from here on, extending its aging bull market gains, as the shorts will be forced to cover.

Key points

  1. The S&P 500 has broken out of the critical overhead resistance level of 2500
  2. Stronger stocks are likely to outperform if the index continues higher
  3. However, at these elevated levels, traders should enter stocks only if the risk to reward ratio is attractive
  4. Allocate less than 50% of the normal position size while trading pure momentum plays

Therefore, this week, we have selected a few stocks that have broken out to new highs and are likely to extend their gains along with the index. However, traders should keep in mind that the markets are richly valued at the current levels and can quickly turn down from here. Therefore, please close the long positions if the stop loss is hit.

Also, as the stocks rally, please keep trailing the stop loss higher to protect the paper profits.

BA – Buy 250, SL 236, Target 265 and higher

Weekly chart

Boeing started an uptrend in end-2016 after consolidating for about three years. It gained momentum once it broke out to new highs in 2017. Since then, the stock has been in a vertical rally, outperforming the index, which has pushed the RSI into the overbought territory.

Nevertheless, after consolidating for the past few weeks, the stock again broke out to new highs last week. We expect the uptrend to continue, therefore we want to piggyback on it for quick gains. Let’s look at the critical levels to watch out for.

Daily chart

Boeing broke out to new highs on Friday. The consolidation of the past few weeks has corrected the extreme overbought conditions on the RSI. With the latest breakout, we expect the stock to resume its uptrend and rally to $265 levels. The stock can easily surpass its target if the momentum sustains. Therefore, traders can enter at $250 and keep a stop loss of $236. This trade offers a risk to reward ratio of 1:1.

NSC – Buy 128, SL 120, Target 140

Weekly chart

The stock bottomed out in February of last year and rallied until February of this year. Thereafter, the stock entered a period of consolidation that lasted for almost seven months. Last week, the stock broke out of the stiff overhead resistance of $125, which shows that the bulls have regained their strength. We now expect the stock to resume its uptrend.

Daily chart

On Monday of the previous week, the stock broke out of $125, which had been acting as a stiff resistance. Thereafter, it extended its gains during the remainder of the week. This shows that the bulls are willing to buy at higher levels. We can buy the stock at $128 and keep a stop loss of $120. We don’t want to hang on to the stock if it falls back into the range. The first target objective is $140. This trade carries a risk of $8 and a probable reward of $12, if it performs according to our expectations.

MED – Buy 57, SL 54, Target 68

Weekly chart

The stock has a history of vertical rallies, as shown on the chart. This time too, the stock has embarked on a similar sharp up move. Therefore, we want to hop on this ride, expecting it to continue higher. If proven correct, this can be a rewarding trade. However, historical evidence shows that the stock falls sharply once the uptrend ends. Therefore, please strictly adhere to the recommended stop loss.

Daily chart

The stock rose vertically from $42.12 on August 08 to $56.41 on August 18. Thereafter, the stock entered a shallow correction, which was arrested just above $54 levels.

If the stock breaks out and closes above $57, the next leg of up move can carry it to $68 levels. As this is a pure momentum play and has a history of correcting sharply from its highs, we don’t want to keep a deep stop loss. Our stop loss should be below the recent swing lows, at $54. Please trail the stops higher as the stock continues its journey northwards. The risk is $3, while the reward is $11. However, this is a risky play, therefore, please trade it with only 50% of the normal allocation size.

MYOK – Buy 48, SL 40, Target 70

Weekly chart

In the past two months, the stock has almost tripled in value. This shows a very strong momentum in its favor. As a result, the RSI has become extremely overbought. However, the correction only lasted for two weeks, which shows that the bulls are piling on the stock on every small dip. The stock is likely to resume its uptrend once it breaks out to new highs.

Daily chart

After being range bound for most of 2017, the stock broke out with a huge gap up on August 07 and has never looked back. It has almost tripled in value since then, which shows the strong momentum behind it. After a shallow correction, which was arrested just above $40 levels, the stock is on the verge of a breakout to new highs once again.

The stock can be purchased at $48 and the stop loss should be maintained at $40. We don’t want to hold the stock below this level. On the upside, the stock can rally to $70 levels if it can build up momentum once again. However, we recommend trailing the stop loss higher once the stock moves up as it is a high-risk trade. Also, please keep the allocation size small, about 50% of normal.

PEGI – Buy 26.3, SL 23, Target 31

Weekly chart

The stock has not broken out to new lifetime highs; however, it is quoting at its 52-week highs. We like the stock because it has broken out of a bullish ascending triangle pattern, which has a target of $31.59. The stock offers a decent risk to reward ratio, therefore, we want to buy it.

Daily chart

Usually, a breakout pulls back and retests its earlier resistance level, which in this case is $25.13. However, sometimes, the breakout continues higher and never looks back. If the markets remain bullish, we might not get a pullback.

Therefore, we want to buy the stock at $26.3 and keep a stop loss of $23. We don’t want to hold the stock if it falls and sustains below $25 levels. Our target objective is $31. The risk is $3.3, while the probability of reward is $4.7. This is not a momentum play; hence, this is likely to rise slowly.

Author:
Rakesh Upadhyay is a Technical Analyst and Portfolio Consultant for The Summit Group. He has more than a decade of experience as a private trader. His philosophy is to use technical analysis for momentum trading and fundamental analysis for long-term positions. Rakesh likes to keep himself fit by lifting weights and considers himself to be a spiritual person.