By: Zev Spiro
Basic materials names were hit hard yesterday with many closing below their 50-day simple moving averages. Weakness was especially visible in Oil and Gas related names. Below is a short idea in Transocean Ltd. (RIG), followed by a long in Warnaco Group Inc. (WRC), which recorded the highest daily close in it’s history yesterday.
Chart 1: In March the rising trend line was broken, ending the intermediate uptrend in RIG. On March 30th, a bearish warning was signaled when the 20-day Simple Moving Average (SMA) crossed below the 50-Day SMA for the first time since the intermediate uptrend began. A potential bearish head and shoulders pattern is forming, which will trigger with a confirmed break of the neckline. Trigger: confirmed break of the neckline, at $75.50. Target: minimum expected price objective is 65 dollars, measured by the height of the pattern. Protective Stops: may trigger on a confirmed move back above the neckline.
WRC recently broke out of a long consolidation period that began in October. The consolidation formed either a rectangle pattern, or an ascending triangle pattern, both having the same implications and price objectives. There was a lack of volume on the breakout, therefore, an increase of volume will add confidence to the recent trigger.
Chart 2: The daily chart below illustrates the recent breakout in relative strength of WRC versus SPDR S&P 500 Trust (SPY).
Chart 3: The daily chart below outlines the breakout of the pattern leading to all-time new highs. Target: $68 is the minimum expected price objective, obtained by measuring the height of the pattern and expanding higher from the trigger, by the same distance. Protective Stops: may trigger on a confirmed close below $58.
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*DISCLOSURE: No relevant position-subject to change
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