Restaurant Stock’s Comeback Could Land Traders 24% In Just Weeks

The restaurant sector has its share of winners and losers, often decided by changing diner whims. It may take an army of demographic experts to find the next big thing, but the stock market offers its own clues. And the chart of Noodles & Company (NASDAQ: NDLS) suggests it is ready to move.

Noodles & Company is a casual restaurant chain focusing on noodle and pasta dishes from around the world from Pad Thai to mac and cheese. 

The stock now looks ready to burst higher from its technical chart pattern.

NDLS came public in June 2013, at $18 a share, and more than doubled on its first day of trading. Two days later, it topped out just under $52.

Since then, the stock suffered a torturous decline, falling to a low of $17.15 two months ago, punctuated by a huge drop in August on an earnings miss. But trading has been looking up for several weeks with shares advancing to their current price above $22.

#-ad_banner-#Even better, the pattern formed since August is an inverted or upside down head-and-shoulders. This pattern is marked by a set of lows surrounding a lower, and often larger, central low. The neck, or resistance line, is drawn to connect the interim highs between the lows. 

Accompanying the price action, we look for momentum indicators to trend higher and often volume or a derivative of volume to do the same. In this case, both the Relative Strength Index (RSI) and on-balance volume (OBV) have been setting higher lows since September.

Moving average analysis shows prices breaking through and holding above the 50-day moving average. This is important because it tells us that the short-term trend is indeed to the upside. 

Some long-term investors might hesitate here because prices are still well below the 200-day moving average. This longer average is important in assessing the major trend, but we can still use this to our advantage in short-term trading. With the 200-day average currently in the $30 area, there is a lot of room for NDLS to run before long-term investors have to decide if they like the stock or not. 

Head-and-shoulders patterns can be used to find potential upside targets. To do this, we measure the distance between the low point of the head, or central low, and the top of the pattern defined by the neckline, and project that distance upward. The result is the first upside objective of $28.75. Because it is below the current 200-day moving average, that feature will not impede the advance. 

The strategy is to buy when NDLS moves above the neckline, currently at $23.25.

Recommended Trade Setup:

— Buy NDLS on a break above $23.25
— Set stop-loss at $21.75
— Set initial price target at $28.75 for a potential 24% gain in six weeks

This article was originally published on Restaurant Stock’s Comeback Could Land Traders 24% in Just Weeks