For investors using charts and price action to decide, a methodical way to find prospects is important. One technique looks for stocks that show good technical condition and are building a constructive price pattern, a pairing that can indicate a possible breakout is approaching. This tactic centers on two specific metrics: the ChartMill Technical Rating, which judges the general condition and direction of a stock, and the ChartMill Setup Quality Rating, which measures how "tight" or consolidated a stock's recent trading activity has been. The aim is to find leading stocks that are resting before their next possible move up. A recent filter using this approach has pointed to homebuilder TOLL BROTHERS INC (NYSE:TOL) as a stock deserving more examination from a technical viewpoint.
Examining the Technical Base
The first part of this breakout tactic is verifying a stock is in a good upward trend, which is measured by a high ChartMill Technical Rating. A rating of 7 or more is usually viewed as showing a stock is in a clear upward trend. Per the latest technical report, TOL receives a Technical Rating of 7. This number is backed by several good fundamental factors that match the requirements for a technically sound investment.
- Trend Agreement: Both the near-term and longer-term trends for TOL are rated as good. This agreement across different periods is a positive indicator, implying momentum is not only a temporary occurrence but part of a bigger, continued advance.
- Industry Position: In the active Household Durables field, TOL is a high performer, doing better than 81% of its 61 competitors. This comparative strength is a key part of the Technical Rating, as it spots market leaders.
- Moving Average Backing: The stock's price is above all its main simple moving averages (20, 50, 100, and 200-day), and each of these averages is itself in an upward arrangement. This layered agreement of support levels is a typical feature of a good upward trend.
While TOL's market-comparative performance over the last year is moderate (doing better than 59% of all stocks), its solid industry-comparative performance and good trend framework make it a technically suitable pick for the breakout filter.
Judging the Setup Quality
A good trend by itself is not a sign to purchase; buying at a high price can result in quick declines. This is where the second metric, the Setup Quality Rating, is important. It finds times of consolidation or "tight" trading, which frequently come before a new directional move. TOL gets a high 9 out of 10 on this measure, showing a high-grade setup pattern is present.
The technical report explains why this score is so high. The stock has been moving in a set range between about $128 and $145 over the last month and is currently consolidating in the middle of this range. This time of lower volatility and sideways movement lets the stock reduce overbought states and form a base of support. Also, the report mentions the recent formation of a "Pocket Pivot" signal, a price/volume pattern often linked with accumulation by bigger investors, giving another positive confirmation to the setup.
For a trader, this high setup score means clearer, more set risk limits. The consolidation has formed:
- A close resistance area between $139.91 and $140.25, which the price must clearly move above to indicate a possible new upward trend.
- A defined support area between $135.54 and $138.78, which gives a reasonable place to set a protective stop-loss order if the breakout try does not succeed.
A Possible Trading Plan
Built on this study of strength and setup, the technical report proposes a specific, though example-led, trading plan. The concept would be to enter on a breakout above the resistance, with a stop set below the support area.
- Suggested Entry: A buy stop order at $140.26 (just above the resistance area).
- Suggested Exit/Stop Loss: A sell stop order at $135.53 (just below the support area).
- Risk Limits: This setup states a risk of about $4.73 per share, or 3.37% of the entry price.
It is important to stress that this is an automatically created example to show how the technical levels can be applied. Traders must always do their own study, change entry and exit points to fit their individual risk comfort, and know about wider market situations and company-specific news like coming earnings reports.
Locating More Technical Prospects
The pairing of a good technical trend and a high-grade consolidation pattern makes TOL a strong example of what technical investors using this technique look for. For those wanting to find similar setups each day, the process is methodical and can be repeated. You can use the same Technical Breakout Setups filter that found TOL to view an updated list of possible prospects by going to the Technical Breakout Setups page.
Disclaimer: This article is for information only and is not investment advice, a suggestion, or an offer or request to purchase or sell any securities. The trading example given is automatic and for illustration. All investing and trading includes risk, including the possible loss of principal. Readers are advised to do their own separate research and due diligence and talk with a qualified financial expert before making any investment choices. Past results do not guarantee future outcomes.
