As mentioned in last week’s articles, I am going to focus on stocks that have recently hit new highs for the first couple articles this week. As a reminder, when it comes a stock hitting a 52-week high, I prefer to look for ones hitting a “NEW” high. To me, his would be a stock that hasn’t hit a new 52-week high in quite some time. In addition, and more importantly, I want the stock to have broken through a key area of resistance. This way I know that it wasn’t just any move higher, it was a key breakout. Another stock that fits that description would be that of Reynolds American, Inc.
Reynolds American Inc. is a holding company. Reynolds’ operating subsidiaries include cigarette manufacturer in the United States, R. J. Reynolds Tobacco Company, and the smokeless tobacco products manufacturer in the United States, American Snuff Company, LLC. The company operates in two segments: RJR Tobacco and American Snuff. The RJR Tobacco segment consists of the primary operations of R. J. Reynolds Tobacco Company. The American Snuff segment consists of the primary operations of American Snuff Co. and Lane. Two of Reynolds’ wholly owned subsidiaries, Santa Fe Natural Tobacco Company, Inc., and Niconovum AB are among other segments.
Please take a look at the 1-year chart of RAI (Reynolds American, Inc.) below with my added notations:
RAI had a clear resistance at $40 (navy) prior to November. That $40 resistance met my definition of a clear resistance level that would signify an important 52-week high breakout if RAI could manage to break above it. As you can see, the stock finally broke through that $40 resistance in mid-November on big volume. The volume increase adds validity to the breakout. As expected, that previous $40 resistance has become a new support (l blue).
After the breakout above $40, RAI created a new resistance at $42 (red). When you combine this fact, with the recognition of the previous levels at $36 (purple) and $38 (greens), it would appear the stock finds important price levels at the increments of $2.
The Tale of the Tape: RAI formed a key resistance level of $40, which was a 52-week high breakout when RAI broke above it. This should signal higher prices ahead for the stock. As expected, based on RAI’s previous pattern of forming levels on the 2’s, the stock has created a new resistance at $42. A long trade could be made on any pullbacks to the $40 level with an expectation of a run to at least $42 and most likely $44 (the next $2 increment up). A break of $40 would negate the forecast for the stock to move higher.
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!
Christian Tharp, CMT