The American retailer of women’s fashions and accessories headquartered in Charlotte, North Carolina, Cato Corp (NYSE: CATO) seem to be poised for a price surge as per its latest charts.
#1 Downtrend Channel Breakout: As you can see from the daily chart, the stock has been trading within a downtrend channel during the past few months. This is marked in the daily chart in pink color. Currently, the stock has broken out of the downtrend channel. Once the stock breaks out from a downtrend channel, it has the potential to move further up.
#2 Price above MAs: The price is currently above both the short-term moving average of 50-day SMA and the longer-term moving average of 200-day SMA. This is a possible bullish sign.
This indicates a possible bullish setup.
#4 Bullish Stoch: The %K line is above the %D line of the stochastic, indicating possible bullishness.
#5 Bullish ADX and DI: The ADX indicator shows bullishness because (+DI) is greater than (-DI), ADX and (+DI) are above (-DI), and ADX is starting to move up from below both (+DI) and (-DI).
#6 Breakout from the consolidation area: The weekly chart shows that the stock has currently broken out of a consolidation area.
This area is marked as a light blue color rectangle. This is also a possible bullish sign.
#7 MACD above Signal Line: The weekly chart also shows that the MACD (light blue color) is currently above the MACD signal line (orange color). This typically indicates a bullish setup.
#8 Bullish Stoch: The %K line is above the %D line of the stochastic in the weekly chart as well, indicating possible bullishness.
Recommended Trade (based on the charts)
Buy Levels: If you want to get in on this trade, the ideal buy level for CATO is if it corrects to the support level of around $15.70. But for those with a higher risk appetite, you can purchase half the intended quantity of shares of CATO at the current price of $16.36.
TP: Our target prices are $20 and $26 in the next 4-6 months.
SL: To limit risk, place stop-loss at $13.80. Note that the stop-loss is on a closing basis.
Our target potential upside is 22% to 65% in the next 4 to 6 months.
- Entry at $15.80: For a risk of $2.00, our target rewards are $4.20 and $10.20. This is a nearly 1:2 and 1:5 risk-reward trade.
- Entry at $16.36: For a risk of $2.56, our target reward (TP#2) is $9.64. This is a nearly 1:4 risk-reward trade.
In other words, this trade offers nearly 2x to 5x more potential upside than downside.
Risks to Consider
The stock may reverse its overall trend if it breaks down from the downtrend channel breakout level 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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