May 20, 2015
Don't Miss This Stock's
Breakout 'Buy' Signal
By Michael Kahn
I am a big fan of looking at charts one degree of time further out than I plan to trade. It is the market-ification of the old saw about seeing the forest for the trees.
For instance, the short-term chart of programmable circuit and semiconductor maker Xilinx (NASDAQ: XLNX) is a mess. But when we pull back to the weekly chart we can clearly see a breakout with supporting technicals.
Considering that the semiconductor sector remains in a long-term uptrend, this is good news for the stock. When a sector is strong, lagging stocks within it can see big gains as they catch up with their peers. The trick is that they have to exhibit technical strength before we can safely buy them.
XLNX now shows that strength.
Last week, powered by buyout talk in rival Altera (NASDAQ: ALTR), Xilinx jumped higher from a four-week trading range.
In the short term, the ensuing rally ran into resistance from the December high after becoming technically overbought. By itself, an overbought condition is not enough to shun a stock. Overbought stocks can become more overbought before the trend ends.
The daily chart seems to be all over the place with no underlying pattern other than jumpiness. The best we could have said about it before the rally was that on-balance volume, which measures volume on up days minus volume on down days, was rising all year. That suggests demand was welling and, of course, that is a positive development.
As mentioned, the view from the weekly chart is much nicer:
From here, it is easy to spot a long-term rising trend and the 2014-2015 decline that formed a long but needed correction. Last week's rally also broke trendline resistance from that correction to the upside. Further, it pushed the stock convincingly above its 40-week (200-day) moving average.
It appears to be all systems go on the price action front.
Sentiment analysis adds to the bullish case. On April 22, the company reported a revenue miss and uninspiring guidance after the bell. After a small dip, the stock moved sideways for weeks. It was subtle, to be sure, but I take that to mean the market shrugged off bad news, and that is bullish.
Toss in a recent analyst upgrade on fundamentals, a nice dividend yield and strong sector sentiment based on the usually prescient social media site StockTwits, which has proven to be an indicator rather than a contrarian indicator of pending stock movement, and we've got the full package.
The only caveat is the short-term overbought condition mentioned above. But with so much else going for it, I expect XLNX to ride out any bumps that may cause. Look for a return to last year's highs in the $55 area over the next few months.
Recommended Trade Setup:
-- Buy XLNX at the market price
-- Set stop-loss at $44
-- Set initial price target at $55 for a potential 18% gain in 12 weeks
Editor's note: Xilinx currently offers a 2.7% yield, but you can boost that yield above 10% simply by holding shares in a high-income brokerage account.
A regular brokerage account doesn't allow you to do anything more than simply buy and sell stocks. But if you hold your stocks in a high-income brokerage account, you can collect income each month -- $1,200 or more in some cases. Most investors can easily convert their existing brokerage account with no hassles at all.
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