For investors who use charts and price action to guide their choices, a methodical process can help sort the market's distractions. One process looks for stocks that are both technically sound and making a constructive pattern, a pairing that can mark a possible breakout. This idea centers on two specific scores from ChartMill: the Technical Rating, which judges the general condition and direction of a stock, and the Setup Quality Rating, which checks if the price action is tightening into a tradable pause. By finding securities that rate well on both measures, technical investors can locate chances where a sound existing trend might be about to continue its rise.
Companhia de Saneamento Basico do Estado de Sao Paulo SABESP (NYSE:SBS), or Sabesp, has recently been found on such a search. As Brazil's major water and sewage utility, serving the state of São Paulo, its stock is now showing a profile that matches closely with the conditions looked for by this breakout idea.
Looking at the Technical Base
The heart of this process first needs a stock to be in a verified uptrend, as a sound technical base raises the chance that a breakout will result in further gains. Sabesp's ChartMill Technical Report gives it a rating of 9 out of 10, putting it securely in the top group of stocks from a technical view.
Important parts adding to this high rating are:
- Long-Term Trend: The long-term trend is seen as positive, which is a key support for any breakout setup. This is shown by the stock trading well above its important rising moving averages (SMA50, SMA100, and SMA200).
- Relative Strength: Sabesp has done much better than the wider market over the last year, with a 12-month gain of almost 63%. Its relative strength score of 89.8 shows it has done better than 90% of all stocks in the market in this time, a sign of strength.
- Sector Performance: Inside the Water Utilities industry, Sabesp performs better than 92% of similar companies, showing its strength is not only wide-market led but also specific to its sector.
While the short-term trend is now neutral, this is not uncommon during a pause phase and does not take away from the strongly positive long-term view. This firm technical condition is exactly what the breakout screen looks for, as breakouts from a pause in weak stocks are much less dependable.
Judging the Setup Quality
A sound trend by itself is not a signal to buy; entering at a high point can lead to quick declines. This is where the Setup Quality Rating becomes important, finding times when the stock is gathering energy for its next move. Sabesp gets a top-level Setup Rating of 9, marking a very good pause pattern.
The technical report points out several traits of a high-grade setup:
- Lower Volatility & Pause: The stock has been trading in a set range between about $27.09 and $30.63 over the last month, with the present price located in the middle. This tightening behavior after a previous rise is a standard basing pattern.
- Clear Support Area: A well-marked support area exists between $27.25 and $27.33, made by a combination of trendlines and moving averages. This gives a reasonable and close level for setting a protective stop-loss order, setting the trade's risk.
- Positive Signs: The report mentions a recent "Pocket Pivot" sign, a volume-based pattern that often points to accumulation by big investors during a pause, a positive confirmation inside the setup.
This pairing, a tight pause near highs inside a strong uptrend, with clear support below, creates the chance for a clear breakout. The idea favors such setups because they give a good balance: a clear point to enter on a breakout, a reasonable area to control risk, and the force of a sound existing trend to support the move.
A Possible Trading Plan
From this review, the ChartMill report proposes a specific, though automatic, trading structure. It suggests an entry point on a breakout above the recent range at $29.24, with a stop-loss set just below the marked support area at $27.24. This would cap the idea-based risk on the trade to about 6.8% of the entry price. It is important to recall that this is an example made from the technical pattern; investors must always do their own review and adjust any plan to their personal risk level.
Locating Like Chances
Sabesp shows the kind of chance the Technical Breakout screen is made to find each day. For investors wanting to see the present list of stocks meeting these strict technical and setup conditions, the live results of the search are available here: Technical Breakout Setups Screen.
Disclaimer: This article is for information only and does not make up investment advice, a suggestion, or an offer to buy or sell any security. The review is based on technical data and automatic rating models. Investing includes risk, including the possible loss of principal. Always do your own research, think about your financial position and risk level, and talk with a qualified financial advisor before making any investment choices.