For investors who use charts and price action to guide their choices, a methodical process can help reduce the market's distraction. One such technique involves searching for stocks that show both solid technical condition and a clear formation, indicating a possible breakout might be close. This plan centers on two main proprietary measures from ChartMill: the Technical Rating, which judges the general condition and direction of a stock, and the Setup Quality Rating, which examines the consolidation formation to find a distinct entry point. The aim is to find leading stocks that are resting before their next possible advance. A recent filter using this process has identified Quanta Services Inc (NYSE:PWR) as a notable candidate.
Technical Condition: A Market Leader in a Solid Uptrend
The base of a promising breakout formation is a stock with clear technical condition. This is measured by ChartMill's Technical Rating, a score from 0 to 10 that combines items like relative performance, trend direction, and moving average agreement. A high score shows a stock is both in a clear uptrend and doing better than the wider market, an important feature for a possible leader.
Quanta Services receives a top Technical Rating of 10, putting it in the highest group of all stocks. This leading score is backed by a strong collection of data from its technical report:
- Trend Agreement: Both the long-term and short-term trends are scored as positive. The stock is trading well above its important moving averages (20, 50, 100, and 200-day SMAs), and all these averages are increasing, confirming a solid, multi-layered uptrend.
- Strong Relative Performance: The stock's yearly gain of over 115% puts it in the top 5% of all stocks. Also, it performs better than 85% of other stocks in the Construction & Engineering industry, showing industry leadership.
- Market Leadership: While the S&P 500's long-term trend is negative, PWR is trading near its 52-week high. This difference is a typical sign of a stock guiding the wider market upward, a wanted trait for technical investors looking for condition.
This solid technical foundation is important because it raises the chance that any following breakout from a consolidation formation will continue the existing primary uptrend instead of reversing.
Setup Condition: A Clear Formation Approaching a Decision Point
A strong trend by itself is not a buy signal; entering a stock that has just made a large, extended advance often results in buying at a high. This is where the Setup Quality Rating becomes important. It scores from 0 to 10 how closely a stock is consolidating, searching for lower volatility and the development of a clear support area, which allows for a specific, managed-risk entry.
Quanta Services shows a high Setup Quality Rating of 9. The technical report states that prices have been consolidating recently with less volatility, making a visible formation. Important parts of this setup include:
- Specific Trading Range: Over the last month, the stock has traded between about $531 and $584. It is currently testing the top limit of this range.
- Clear Support and Resistance: The analysis finds a notable support area between $563.93 and $572.60, made by a mix of trendlines and moving averages. Just above the current price lies a noted resistance zone at $577.96.
- Institutional Activity: The report points out that large investors have shown activity in PWR in recent days, as measured by the Effective Volume indicator. This can be a confirming element that adds believability to the setup.
This high-condition consolidation is what technical investors seek. It represents a halt in the uptrend where the stock absorbs its gains, forms a new base of support, and gets ready for its next possible stage upward. The nearness to resistance gives a clear level to observe for a breakout confirmation.
A Possible Trading Plan
Based on this analysis, a specific, though only example, setup appears. The reasoning follows the plan's ideas: enter on a confirmed breakout above resistance, with a stop-loss set below the nearby support area to control risk.
- Possible Entry: A buy stop order could be set just above the identified resistance at $577.97, waiting for the stock to confirm its move to break out of the recent range.
- Possible Exit (Stop-Loss): A stop-loss order could be placed just below the support area at $563.92.
- Risk Measures: This plan would limit the theoretical loss on the trade to about 2.43% of the entry price. It is important to note that the report itself warns that this stop distance is fairly close compared to the stock's average daily move, and investors might want to change these levels based on their own risk comfort and time frame.
Finding Other Opportunities
The filter that found Quanta Services is run each day to discover new possible breakout setups that meet the strict needs of high technical and setup scores. Investors wanting to see the current list of qualifying stocks can view the live results through the Technical Breakout Setups screen.
Disclaimer: This article is for informational and example purposes only. The analysis, trade ideas, and screens discussed are not investment advice. All investing and trading involves risk, including the possible loss of principal. Investors should always do their own independent research, think about their personal financial situation, and talk with a qualified financial advisor before making any investment choices. Past performance is not a guarantee of future results.