Our Second Best Trading Setup Reaches Entry Point

October 16, 2012 by  
Filed under News

 

One of the most effective strategies in the market continues to be buying stocks with rapidly rising estimates, with a track record of beating those estimates, near an ideal technical entry point. Especially if the company has grown earnings and sales significantly over the past few years. The consistent strong growth over time and the recent rapid increase in consensus estimates gives us the fundamental momentum to give us an edge in our trading.

 

And if you can combine this with a bullish technical pattern, the results can be very explosive.

 

Today I am going to look at a stock with some of the best fundamental momentum in the market: Cirrus Logic (ticker CRUS). Consensus estimates for the upcoming quarter have mushroomed nearly 80% over the past 90 days. While estimates for next year have increased nearly 50%.

 

And this is after meeting or beating estimates over the past four quarters. It should be noted that they provide a key component for the iphone 5.

 

Lets take a look at the chart:

CRUS chart

Notice the series of higher highs and higher lows on the chart. The stock price has no overhead resistance levels over the past 10 years and is getting close to the all-time highs made back in 1995. Average volume has been much stronger recently versus the volume when those highs were made which is a good sign.

What is really exciting is how the price has moved into multi-year highs on strong volume. The late summer rally produced a third high in a very wide bullish 3 rising valleys pattern. A bullish pattern with a breakout once the price reaches 52-week highs.

 

The strong volume gap in late July is acting as support as it did for the prior gaps over the past year. If the market or fundamentals do not provide too many headwinds, the stock will typically continue to rise after the explosive gap and then pull back to the top of the gap area. And CRUS has done that in this case.

 

A good entry is once oscillators move out of oversold levels as the price is bouncing off the horizontal or uptrend support. Which CRUS has done as well. We jumped in last week and are riding this one higher as the stock has about the best estimate revisions combined with strong long-term earnings growth (nearly 50% per year over the past five years). Combined with the strong technical factors outlined above. It should be noted also that there is a large cup with handle pattern started in early 2011 that it broke out of early this year on enormous volume. And a smaller bullish ascending base pattern as well.

 

Now if the market begins to turn over we can sell once the price fills the gap up to near $42. Or a couple dollars above the 52-week highs for a very quick 20% to 25% profit. Our stop-loss is just below the top of the gap – just below $36.73. If the market rebounds strongly here, you can ride this one higher into its earnings release in a few weeks. A more conservative approach would be selling just prior to the earnings release. An earnings miss and weak outlook would certainly send the stock in the opposite direction and test the top of the recent gap just below $36. And likely fill the gap down to $30.

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