For investors who use charts and price patterns to make decisions, a methodical process for finding possible trades is important. One such process involves looking for stocks that are both technically sound and forming a constructive consolidation pattern, indicating a possible breakout is approaching. This method depends on two main proprietary metrics from ChartMill: the Technical Rating, which measures the general condition and trend of a stock, and the Setup Quality Rating, which judges the condition of its present price consolidation. By concentrating on securities that achieve high marks in both areas, technical investors try to locate chances in stocks with clear upward momentum that are resting before their next possible move higher.
Judging Technical Strength
The base of this breakout method is a stock's fundamental technical condition, measured by ChartMill's Technical Rating. A high rating shows a stock is in a confirmed uptrend across several timeframes, backed by elements like positive moving average alignment and sound relative performance. For a breakout to have a better chance of success, it should happen within the setting of a larger uptrend, not opposed to it.
Eastman Chemical Co. (NYSE:EMN) presently receives a Technical Rating of 7, putting it in a good position. This score is backed by several specific elements from its technical report:
- Trend Alignment: Both the short-term and long-term trends for EMN are rated as positive. This alignment is a key sign of continued buying pressure and lowers the risk of trading against the dominant market direction.
- Moving Average Support: The stock is trading above its important short-term moving averages (20-day, 50-day, and 100-day SMAs), which are all in rising formations. This establishes a sequence of possible support levels below the present price.
- Recent Momentum: The stock has shown firm near-term performance, with a 8.33% gain over the past month and a 15.98% increase over the last quarter.
However, the report also mentions areas of concern that investors should consider. EMN's longer-term performance compared to the wider market and its industry peers has been poor, and it stays far below its 52-week high. This highlights the importance of the breakout setup quality; a strong pattern can indicate a change of this longer-term weak performance.
Judging the Breakout Setup Quality
While a firm technical base is needed, it is not enough for a well-timed entry. A stock can be in a strong uptrend but be excessively extended, presenting a poor risk/reward setup. This is where the Setup Quality Rating becomes vital. A high score shows the stock is experiencing a healthy consolidation, trading in a fairly narrow range with lowering volatility, which frequently comes before a new directional move.
EMN stands out here, with a Setup Rating of 9. This very good score implies the stock is in an ideal position for a possible breakout. The technical report lists the features of this setup:
- Clear Consolidation: Over the past month, EMN has traded between $63.30 and $70.39. It is presently testing the upper limit of this range, showing a decision point is close.
- Clear Support and Resistance: The analysis finds a clear support area between $67.65 and $68.72, made by a combination of trendlines and moving averages. Just above the present price lies a defined resistance area between $69.04 and $70.34. A clear move above this resistance could show the beginning of a new uptrend.
- Supportive Signals: The report also mentions a recent "Pocket Pivot" signal, a volume-based pattern that often shows accumulation by institutional investors during a consolidation stage, adding more support to the setup.
Based on this analysis, a sample trading plan is proposed: an entry on a breakout above $70.35 (just above the resistance area) with a stop-loss order placed below the support area at $67.64. This establishes a clear and measured risk for the trade.
Conclusion
For technical investors, Eastman Chemical Co. (EMN) presents an interesting example of a stock fulfilling specific breakout conditions. Its adequate Technical Rating of 7 confirms it is operating within a larger uptrend, giving a favorable setting. More significantly, its outstanding Setup Rating of 9 points out a high-condition consolidation pattern with clear, close levels for both risk management (support) and chance identification (resistance). This pairing is exactly what the breakout screening process tries to find.
Find More Possible Breakout Setups
The review of EMN was produced using a methodical screen for stocks with sound technicals and high-condition setups. New chances are found daily as market situations change. You can review the current list of qualifying stocks by visiting the Technical Breakout Setups screen.
Disclaimer: This article is for informational and educational purposes only. It is not intended as investment advice, a recommendation, or an offer or solicitation to buy or sell any securities. The trading setup mentioned is an automated example for illustrative purposes. All investing and trading involves risk, including the possible loss of principal. You should conduct your own research and consult with a qualified financial professional before making any investment decisions. Past performance is not indicative of future results.
