The American manufacturer of both residential and commercial water heaters and boilers, A. O. Smith Corp (NYSE: AOS) seems to be gearing up for a surge as per its latest charts.
Bullish Indications
#1 Ascending triangle pattern: AOS’s daily chart shows that the stock has been forming an Ascending Triangle pattern. An Ascending Triangle pattern is a bullish pattern. This is marked on the daily chart in purple color. A breakout from the ascending triangle pattern generally indicates that the stock could move higher. The breakout level also acts as a good support level.
Daily Chart – AOS
#2 Trading Above MA: The stock is currently trading above its 50-day SMA, which implies that the bulls are currently in control.
[hana-code-insert name=’adsense-article’ /]#3 MACD Above Signal Line: In the daily chart, the MACD line (light blue color) is currently above the MACD signal line (orange color) which is typically considered bullish.
#4 Double Bottom Pattern: The stock has been recently forming a double bottom pattern, which is a bullish reversal pattern.
This is marked in orange color in the daily chart.
Once the stock breaks out from this double bottom pattern, it could possibly move upwards.
#5 Bullish Stochastic: The %K (blue) line of stochastic is currently above the %D (Orange) line. This is a possible bullish indication.
#6 Support At Fibonacci Level: Usually, after an up-move, stocks retrace to any of the key Fibonacci levels before surging back again. AOS had taken support at the 38.2% Fibonacci support level of the upmove and now above the 50% Fibonacci support level, as seen in the weekly chart. This seems like a good point to bounce up higher.
Weekly Chart – AOS
#7 Bullish Stochastic: The %K (blue) line of stochastic is currently above the %D (Orange) line in the weekly chart as well. This is a possible bullish indication.
#8 MACD above Signal Line: In the weekly chart, the MACD line has crossed above the MACD signal line which is a bullish signal.
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 breaks out above the double bottom pattern and ascending triangle pattern at around $49.40
TP: Our target prices are $60 and $70 in the next 3-6 months.
SL: To limit risk, place a stop loss near $43.40. Note that this stop loss is on a closing basis.
Our target potential upside is 21% to 42% in the next 3-6 months. For a risk of $6.00, the target rewards are $10.60 and $20.60. This is a nearly 1:2 and 1:3 risk-reward trade.
In other words, this trade offers nearly 2x to 3x more potential upside than downside.
Risks to Consider
The stock may reverse its overall trend if it breaks down with high volume from the ascending triangle pattern and double bottom pattern. 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 its sector.
Happy Trading!
Tara
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