For investors who use charts and price action to guide their choices, a methodical way to spot opportunities is important. One such technique involves searching the market for stocks that are in a solid technical uptrend and are also creating a constructive price formation, indicating a possible breakout may be near. This tactic uses two main proprietary measures from ChartMill: the Technical Rating, which judges the general condition and trend of a stock, and the Setup Quality Rating, which measures how tight and clear its current consolidation is. The aim is to locate technically healthy stocks that are tightening, presenting a specific entry point with a clear risk level. A recent scan using this approach has identified Verizon Communications Inc (NYSE:VZ) as a candidate deserving more examination from a technical viewpoint.
A Solid Technical Base
The first part of this breakout tactic is a high Technical Rating, which confirms the stock is in a definite uptrend and is a relative market leader. Verizon’s present rating of 9 out of 10 puts it solidly in this group. A detailed look at the full technical report shows the details of this solid score.
- Trend Alignment: Both the short-term and long-term trends for VZ are rated as positive. This agreement across timeframes is a strong sign of continued buying pressure and lowers the chance of the stock being in a temporary rally.
- Moving Average Support: The stock’s price is trading above all its main simple moving averages (SMA), including the 20, 50, 100, and 200-day SMAs. Also, each of these averages is itself rising, forming a layered support structure under the price.
- Relative Strength: Inside its industry group, Diversified Telecommunication Services, Verizon is doing better than 75% of its peers. On a wider scale, it is doing better than 84% of all stocks in the market. This relative strength shows the stock’s rise is not just due to a general market increase but shows specific investor confidence.
This solid technical foundation is necessary for the tactic because it raises the chance that any breakout from a consolidation will keep going in the direction of the main trend, instead of failing or turning down.
A Clear Setup Formation
A solid trend by itself is not a buy signal; buying at a high price can lead to quick declines. This is where the Setup Quality Rating becomes important. It finds times of contraction or consolidation inside the uptrend, which often come before the next move up. Verizon’s Setup Rating of 8 indicates it is in such a phase.
- Recent Consolidation: The technical report notes that over the last month, VZ has been trading in a fairly narrow range between $48.87 and $51.66. This time of sideways movement after a notable rise lets the stock absorb its gains and form a new base of support.
- Clear Support and Resistance: The setup is marked by clear technical levels. A main support area is found between $49.47 and $49.97, created by multiple trendlines. Above, a resistance area is between $50.33 and $51.39. This creates a clear area where a decisive move above resistance could indicate a breakout.
- Supportive Signals: The report also points out a recent "Pocket Pivot" signal, a volume-based indicator that suggests buying by larger investors during the consolidation, adding another point of confirmation to the price action.
For a technical trader, this clear setup answers the "when" question. It offers a possible entry point (a break above resistance) and a sensible place for a protective stop-loss order (a break below support), thus setting the trade's risk from the start.
A Possible Trading Plan
Based on the study of these two ratings, the report describes a sample trading plan. It proposes a possible entry on a Buy Stop order at $51.40, which is just above the noted resistance area. A Stop Loss order is suggested at $49.46, placed below the nearby support area. This plan would create a risk of about 3.77% on the trade. It is important to know this is an example made from the technical levels; investors must always adjust entry, exit, and position size to their own risk tolerance and plan.
Locating More Prospects
The case of Verizon shows how using a solid Technical Rating with a high Setup Quality Rating can identify actionable technical plans. This scanning method is used each day to the wider market. For investors wanting to see the current list of stocks meeting similar strict technical and setup conditions, the results are in the Technical Breakout Setups screen.
Disclaimer: This article is for information only and is not investment advice, a suggestion, or an offer or request to buy or sell any securities. The study is based on technical indicators and past data, which are not assurances of future results. All trading and investment choices involve risk, including the possible loss of principal. Investors should do their own research and talk with a qualified financial advisor before making any investment choices.