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FDO breakout pullback - the Mesh Report

FDO breakout pullback

Christian Tharp, CMT October 31, 2011 0

In several of the articles I have written over the last several months I have discussed potential 52-week high breakout opportunities. With those opportunities, I always like to review stocks that would be breaking key resistance levels in the process of hitting their new high. But for today, I’d like to look at a stock that has already broken to a new 52-week high: Family Dollar Stores, Inc.

Family Dollar Stores, Inc. operates a chain of more than 6,800 general merchandise retail discount stores in 44 states, providing primarily consumers with a selection of priced merchandise in neighborhood stores. Its merchandise assortment includes consumables, home products, apparel and accessories, and seasonal and electronics. The Company offers a focused assortment of merchandise in a number of core categories, such as health and beauty aids, packaged food and refrigerated products, home cleaning supplies, house wares, stationery, seasonal goods, apparel and home fashions. Its stores operate on a self-service basis, and its low overhead enables it to sell merchandise at a moderate markup.

To review Family Dollar Store’s stock, please take a look at the 1-year chart of FDO (Family Dollar Stores, Inc.) below with my added notations:

(Click for full-sized image)

For most of the year, FDO had a resistance level at $56 (violet). This resistance level was a 52-week high breakout when the stock shot higher in mid-October. This breakout should be a sign that the stock is moving overall higher. However, that certainly doesn’t mean that FDO won’t pull back first, which it actually appears to be doing already. The old $56 resistance should provide support for FDO on a pullback. If not, the up trending support (purple) should be the next level of support.

The Tale of the Tape: FDO broke out to a new 52-week high in mid-October and now appears to be pulling back. A long trade could be made at $56 with a stop placed below that level. If that first level of support doesn’t hold, another long trade might be made on a pullback to the up trending support level, which currently appears to be around the $53 area.

Before making any trading decision, decide which side of the trade you believe gives you the highest probability of success. Do you prefer the short side of the market, long side, or do you want to be in the market at all? If you haven’t thought about it, review the overall indices themselves. For example, take a look at the S&P 500. Is it trending higher or lower? Has it recently broken through a key resistance or support level? Making these decisions ahead of time will help you decide which side of the trade you believe gives you the best opportunities.

No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade.  Capital preservation is always key!

 

Good luck!

Christian Tharp, CMT



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