The home construction company based in Horsham, Pennsylvania that specializes in building luxury homes, Toll Brothers Inc. (NYSE: TOL) seems to be poised for a price surge as per its latest charts.
#1 Falling Wedge Pattern: As you can see from the daily chart, the stock has been trading within a falling wedge pattern during the past few weeks. This is marked in the daily chart in orange color. A Falling Wedge Patter is a bullish pattern. Once the stock moves up and breaks out from it, it has the potential to move further up.
#2 Double Bottom Pattern Being Formed: The daily chart of TOL shows that a double bottom is being formed within the falling wedge pattern. This is marked in the daily chart in purple color. A Double bottom pattern is a bullish reversal pattern, indicating that the stock could possibly move upwards shortly.
[hana-code-insert name=’adsense-article’ /]#3 MACD above Signal Line: The daily chart of TOL shows that the MACD (light blue color) is currently above the MACD signal line (orange color).
When this happens, a potential buy signal is generated.
The stock is also trading above its 200-day SMA, indicating that the bulls are still in control.
#4 Pennant: The stock was in a strong uptrend for the past several months.
Then the stock started consolidating and was in a narrow range.
This is a pennant pattern, which is a continuation pattern. This is marked as blue line in the weekly chart. Whenever a stock breaks out of the pennant pattern, it typically continues its previous trend which is an uptrend in this case.
#5 Unbroken Uptrend in Weekly Chart: As evident from the weekly chart, the stock is in an uptrend as it has been making higher highs and higher lows for the past several months. The stock price is above the 50-week and 200-week SMA, and the 50-week SMA has crossed above the 200-week SMA. All these are possible bullish signs.
#6 Support at Fibonacci Level: The stock had taken support at the 61.8% Fibonacci retracement level of the move from $26.81 to $52.73. Usually, after an up-move, stocks retrace to any of the key Fibonacci levels before resuming its upmove. So, this 61.80% retracement level seems like a good support area.
Recommended Trade (based on the charts)
Buy Levels: If you want to get in on this trade, you can purchase shares of TOL in two scenarios
- If the stock breaks out of the double bottom pattern in the daily chart. This translates to a price of around $49.
- If the stock corrects to the bottom of the falling wedge pattern in the daily chart. This translates to a price of around $43.30.
TP: Our first target price (TP#1) is $60 and the second target price (TP#2) is $70 in the next 4-8 months.
SL: To limit risk, place stop-loss at $42.50. Note that stop loss is on a closing basis.
Our target potential upside is 22% to 62%.
- Entry at $43.30: For a risk of $0.80, our target rewards are $16.70 and $26.70. This is a 1:21 and 1:33 risk-reward trade.
- Entry at $49: For a risk of $6.50, our target reward (TP#2) is $21. This is a 1:3 risk-reward trade.
In other words, this trade offers nearly 3x to 33x more potential upside than downside.
Risks to Consider
The stock may reverse its overall trend if it breaks down from the falling wedge pattern with a high volume. The sell-off of the stock could also be triggered in case of any negative news, overall weakness in the market, or any regulatory changes in the sector.
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