MarketSmith Review – A Series
This is an ongoing review of MarketSmith features that help us make money. In previous articles, we talked about workflow and daily planning that helps us prepare for the trading day. In this article, we’ll talk about pattern recognition and additional homework that we do for every potential candidate prior to entry.
Cup and Handle Continuation Pattern
Micron (MU) is completing a cup and handle formation, one of three highly profitable continuation patterns. When the handle forms, it usually fades slightly, as the remaining sellers dissipate. Once the stock breaks above the pivot point, we enter and trail our stops.
A couple of things stand out on this chart. in the left panel, we see estimates are being ratcheted higher for 2018. We also see the stocks relative strength line rising (RS = 96). This tells us the stock exhibits relative strength versus the S&P500 benchmark.
Investors Business Daily – Micron (MU) Additional Homework
Logic dictates that a company with improving sales and earnings will captivate the attention of analysts and fund managers. We like candidates with ratings in the 95 to 99 range, especially as they near a buy point. Additionally, the stock is being accumulated by institutions with a rating of “B” as we see below. Data courtesy Investors Business Daily
Micron exhibits all the criteria we like to see from the fundamental perspective. Growth in sales and earnings that outshines the competition is a prerequisite to winning stock picks. Micron earnings have grown 213% in the latest quarter. Sales increased by nearly 60%. Profit margin is nearly 30% – excellent!
Earnings and sales increasing greater than 30% is a good benchmark.
Micron: Is Now the Time to Buy?
When to enter and when to exit are some of the hardest decisions a new trader must master. History has shown using high probability setups based on pattern recognition tips the scales in our favor. Additionally, the pattern recognition and breakout alerts provided by MarketSmith help us master our emotions. When the alert triggers, we enter.
Disclosure: We’ve been in Micron since the stock moved above its daily 9-period exponential moving average near 52.
The trading room took profits in part on Friday, as the position gained 18%. Should the pattern trigger a breakout this week, we’ll add to our position again. Targets would be the depth of the cup for starters (+18 = 80 +/-). This isn’t a guarantee. It is a target for a reason.
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