I am thrilled and honored to have joined forces with Hilary Kramer in her Breakout Stocks investing service as we search for, well, stocks that are ready to break out. Like Hilary, I go through a careful analysis that includes a three-prong approach: technical (charts), fundamentals and the macro view. One of our recent trades, Monolithic Power Systems, Inc. (NASDAQ:MPWR), is breaking out from one of the more bullish patterns last week.
MPWR is a high-performance analog semiconductor company that makes chips for everything from industrial power units to automobiles to consumer products.
There are several things we like about MPWR. For starters, it trades with a PEG ratio of 1.3 and all seven of the analysts that cover the stock expect earnings to grow by 19% annually in the next two years.
We also like that the shares have been consolidating as the price moves higher after bouncing off the 200-day moving average in February. This has put MPWR in a position to rally and re-test its all-time high of $69.25, and we actually expect it to continue beyond that price.
Take a look at the chart below and you’ll see that the stock has had trouble breaking above the $62.70 area several times this year. I’ve drawn a line at that price and circled some of the attempted breakouts.
A breakout of above-average volume occurred the week before last, and for much of last week the stock was able to hold above the breakout level, confirming that it should rally and ultimately retest that all-time high set in December 2015.
Click on the chart to enlarge to full size.
This is what’s called an ascending triangle pattern, which is made up of a horizontal line at the top and an uptrend line below. The psychology behind the pattern is that the buyers are not yet strong enough to push the stock through the resistance level ($62.70 in this case), but each failure results in a shallower pullback, suggesting that buyers are willing to pay more each time. The confirmation is a close above resistance with a few days above what becomes the new support level.
I also believe it’s important to manage the downside and, in MPWR’s case, I would seriously consider cutting losses on a close below $57, which is just below the 200-day moving average (blue line).
Matthew McCall is founder and president of Penn Financial Group, an investment advisory firm. Matt also is Editor of FUTR Stocks, the ETF Bulletin and Co-Editor of Breakout Stocks.
