After the market’s strong post-election rally, we’re seeing more individual names primed for one of my favorite (and most reliable) trade set-ups: the breakout/pullback.
The pattern forms when a stock breaks above an important resistance line and then pulls back a few days later to retest the breakout level. The old resistance line turns into support, providing a good entry close to support, which lowers risk. Timing is significant here because the breakout often leads to a new uptrend and more upside.
One company Hilary Kramer and I recently recommended in our Breakout Stocks service is a good example of this set-up. Xylem (NYSE:XYL) is a water technology company. In the big picture, the United States’ water system in very poor condition, so an infrastructure bill from the incoming administration will provide a nice boost for both the sector and the stock.
XYL is now closing in on long-term support at the 200-day moving average (the blue line), and the last time this happened it bounced and rallied to a new all-time high. The set-up is favorable for history to repeat itself, making the stock a good buy at current prices near support. In terms of managing the downside, we would re-evaluate the trade if it closes below $46.
Matthew McCall is founder and president of Penn Financial Group, an investment advisory firm. Matt also is Editor of FUTR Stocks and the ETF Bulletin. Earlier this year, Matt and Hilary Kramer teamed up on Breakout Stocks and ETF Trend Trader where Matt serves as the Co-Editor. Most recently, Matt and Hilary joined forces again. This time, they are helping individual investors make money trading ETFs. For more on their latest project, visit www.etfedgesummit.com.