Swedish large cap stock Volvo (Volvb:xome) looks as though it is
about to make an important break higher. Horizontal resistance and an
uptrend line containing price is forming a triangular-looking structure.
This formation is building steam and strength ahead of what could
become a nice break higher.
Prerequisites: The Volvo stock has moved much like
the overall market, bottoming out along with the Swedish market in
November 2008 at around SEK 29 before heading substantially higher. The
stock then ran into trouble in January 2011 when it set its bull market
peak at about SEK 122. The following slump bottomed in October 2011 just
below SEK 64 and has since then been in an uptrend.
The current uptrend is defined by the 50-day and 200-day moving
averages trending higher along with the RSI indicator which is also
trending higher. However, the uptrend has so far been contained by the
horizontal resistance found at about SEK 100. I think we can assume that
this line is of high importance because it has been tested both as
support and resistance on at least five occasions in the past three
years. Support is defined by the rising trend line in the chart below.
The uptrend line combined with the horizontal resistance line is forming
a formation that has the shape of a triangle, which indicates that
buying pressure is stronger than selling pressure as each bottom is set
higher and higher on multiple timeframes.
Chart: Volvo Daily technical overview
If we can clear the resistance we could get a fast move higher as
pressure on resistance has been building for quite a while. If we break
through my first target is SEK 110 (which is derived from the 100
percent extension of the move from the October low in 2011 into the top
in early 2012 and the drop into summer the same year), the next target
would be the SEK 122 level - the bull market top so far.
Trading thoughts: This stock sure is flirting with
resistance and Friday we had the highest close since 2011; a breakout
should be bought I think. The tricky part is the fact that the overall
market is a bit stretched and a general pullback is imminent I think
(due to Cyprus event it might have started). Such a development should
affect the Volvo stock as well and we should get a dip. In my opinion
the dip could be bought as long as the uptrend line isn't violated. In
this case I would like to see a dip towards the SEK 95 level to increase
risk/reward. If I get this chance I would be eager to take it since I
could use a fairly tight stop and be ahead on the next test of
resistance. The stop could then be placed just below the uptrend line.
SEK 90 would be a good level for a stop I think.
If we for some reason get a breakout right away, make sure we get a
strong close on the breakout candle before buying, i.e. wait until the
end of the trading day. Use a 5 percent stop.
Take profits at the first target at SEK 110 or higher your stop to
where you entered the trade once this level is reached and take profits
at SEK 122.
Chart: Volvo Daily trade chart with trade targets
Chart: Volvo Weekly long term overview