“Breakout” patterns can create potentially great trading opportunities, as long as you are ready for them in advance.
So here are 3 markets I have selected which are poised to “breakout”:
USD/JPY (Dollar-Yen currency pair)
I spoke with my good friend and currency trader Kevin Burton about USD/JPY last week. He said that he still expected this pair to come down to the low 90s. Although Kevin admitted that this could take several weeks or months.
Take a look at this chart of USD/JPY:
We can see that USD/JPY is stuck inside a wedge on the daily charts. If Dollar-Yen breaks to the upside of the wedge pattern, then this would be a very bullish and positive move for the pair.
USD/JPY would still face psychological resistance at 100 but once it clears that we could see new highs for the pair.
However, Kevin sees that after such a huge move seen on the monthly charts, it is likely we’ll see a “pullback” to support. Potentially we could see 94 to 92 being tested.
Traders should focus on which side of this wedge USD/JPY will break for potential “breakout” trading opportunities.
LNG – Cheniere Energy
You may recall one of our best stock picks of this year, the natural gas stock LNG (Cheniere Energy).
I like LNG from both a fundamental AND technical perspective.
Fundamentally, LNG is so far the only company licensed in the U.S. to build a facility to export liquefied natural gas. This gives it an edge.
I like LNG from a technical perspective too. Take a look at this chart:
Notice the green arrow which is pointing to where LNG broke below its supporting red uptrend line. This downside break would have been a negative sign for LNG had it not been for what happened next.
Less than 2 weeks after it broke below that trendline, it managed to “force” itself back above it again. In technical analysis, this is a very bullish signal.
Traders have 2 choices here:
(1) If you’re a “value” trader then you can buy LNG here with a hard stop-loss beneath the lows at $26.70 with an initial first target of resistance at $30. Once you’re at $30 you can move your stop to breakeven and see if we can break above the wedge at $30.
2) If you like to play it safer and want a “momentum” breakout to get you into the trade, then you can wait until LNG breaks out of the upside of the wedge at $30 for entry. Stop-loss beneath the lows before the breakout. If we break higher, the next targets are $33 and $35.
Personally I like to do both value and momentum setups.
WMT – Walmart Stores
My last pick of the “breakout” markets is to sell short the giant of America’s retail industry: Walmart (WMT).
I doubt Warren Buffett would be pleased with my choice considering how much he praises this company (along with Coca Cola) as being a safe haven in ANY economic condition.
I agree with Buffett by the way. I think Walmart and Coca Cola are two stocks you should own. Both companies are gushing with cash, pay high dividends and both are powerful well-known brands. (Even the UK has Walmart, but it is called “ASDA”).
So why am I considering to short WMT? Let’s take a look at this chart:
Recently investors have been ditching high dividend yield stocks like Walmart as can be seen by its falling price since July. Even the Wall Street Journal joined in and recommended to dump these dividend stocks.
Why are they being dumped?
One theory is that the economic cycle is changing and that investors are looking for more “risky” stocks like Tech or Financials instead of the traditionally more safer High yield stocks.
The other theory is that people just want to move to “cash” – preferring to stay out of the stock market (and bonds) altogether.
In any case, from its chart, WMT seems to be poised to “fall off” a virtual cliff. It has broken below two major support levels: its 200 daily moving average (dashed green line) and its uptrend line (red line).
If WMT breaks its key support at the June lows of $72.90 (as shown by the blue arrow), then WMT has no real support until $68. That is a 7% move from here.
Traders should focus on shorting WMT if and when we get a close below $72.90 on the daily charts. Stop-loss at the highs before the breakout at $74.13.
If we can hold $68, then I’ll be looking to “load up” on Walmart shares for the foreseeable future.
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Alessio Rastani is a stock market trader at www.leadingtrader.com.