Trade of the Day: Under $10 Stock Ready for a Big Move

MBIA Inc. is overbought but looks to be gearing up for a powerful rally

MBIA Inc. (NYSE:MBI) — Shares of this diversified financial services company have already rallied more than 12% so far this month, in part spurred by the company’s latest earnings report. From a technical point of view, MBI stock looks to have built a bigger picture bottom that could lead to a move higher over the next 6-12 months.

On May 11, the company reported a drop in quarterly earnings from a year ago, primarily as a result of fewer gains on insured derivatives. However, they were still well ahead of expectations and investors bid up shares, which also got a boost in momentum from the broader leadership by the financial sector.

On the multiyear chart, we see that while the going has been choppy since the 2009 lows, MBI stock has respected its long-term uptrend. By May 2013, shares lost upside momentum and topped out, which was confirmed by a lower high in March 2014.

Since then, MBI stock continued to drift lower. So far in 2015, it has traded in a defined and narrowing range. As a result, Bollinger Bands (blue lines) also naturally tightened. The longer the Bollinger Bands stay close together, the more powerful the eventual directional move tends to be.

MBI Stock Chart
Click to Enlarge

On the daily chart below, we see the late-January low marginally undercut the October low. However, in early May, it made a higher low, completing a bottoming formation that was further confirmed by its post-earnings rally.

In the immediate term, MBI stock looks overbought, but a pullback toward the $9.50 area could set it up for the next rally attempt to the $10.50 area in June/July.

MBI Stock Chart
Click to Enlarge

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Download Serge’s trading plan in the Essence of Swing Trading e-book here. As of this writing, he did not hold a position in any of the aforementioned securities.

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