The American manufacturer and maintainer of hopper and tanker railcars headquartered in Saint Charles, Missouri, American Railcar Industries, Inc. (NASDAQ: ARII) seem to be getting ready for a price surge according to its latest charts.
#1 Cup and Handle pattern: The daily chart of ARII shows that the stock has broken out of a cup and handle pattern. This is marked in the chart below in orange color. A cup and handle pattern is a consolidation and breakout pattern. A breakout from this pattern indicates that the stock may move higher. Typically, stocks retrace to the breakout level again before continuing the upmove.
#2 MACD above Signal Line: The daily chart of ARII shows that the MACD (light blue color) is currently above the MACD signal line (orange color). This typically indicates a bullish setup.[hana-code-insert name=’adsense-article’ /]#3 Strong RSI: RSI is above 50 and moving up, indicating strength.
#4 Above MAs: The stock is currently above both 50-day as well as 200-day SMA, indicating that the bulls are in control.
#5 CCI moving up: The CCI is currently above 100 and moving up.
This indicates that an upmove may be imminent for the stock.
There is also a bearish divergence between CCI and price, indicating that the stock may correct in the short-term.
This divergence is marked as purple dotted lines on the daily chart.
#6 Double Bottom Breakout: In the weekly chart, the stock had formed a double bottom pattern, which is a bullish reversal pattern. This is marked in green color in the weekly chart. The stock has currently broken out of this double bottom pattern, indicating that it could possibly move upwards.
#7 MACD above Signal Line: In the weekly chart of ARII, the MACD line is above the MACD signal line. This is usually a good bullish indicator. The stock is also above its 50-week SMA, indicating bullishness in the short term.
#8 Strong RSI: The RSI is above 50 and moving up, indicating strength.
Recommended Trade (based on the charts)
Buy Levels: If you want to get in on this trade, the ideal buy level is if the stock corrects to the breakout level of the cup and handle pattern at around $42. You can also purchase half the intended quantity of the stock at the current price of $45.54.
TP: Our target prices are $50 and $60 in the next 3-6 months. This is based on the breakout level from the cup and handle pattern.
SL: To limit risk, place stop loss at $39.80. Note that the stop loss is on a closing basis.
Our target potential upside is 19% to 43% in the next 3-6 months.
- Entry at $42: For a risk of $2.20, our target rewards are $8 and $18. This is a nearly 1:4 and 1:8 risk-reward trade.
- Entry at $45.54: For a risk of $5.74, our target reward (TP#2) is $14.46. This is a nearly 1:3 risk-reward trade.
In other words, this trade offers nearly 3x to 8X more potential upside than downside.
Risks to Consider
The stock may reverse its overall trend if it breaks down from the cup and handle pattern. The sell-off of the stock could also be triggered in case of any negative news, overall weakness in the market, or any new government rules or regulatory changes in its sector.
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