This Momentum Play Is Poised For Another Quick Pop

Wednesday, October 2, 2013 - 7:00am

by Serge Berger

Investing in momentum and growth stocks has been a profitable strategy so far in 2013, and judging by recent action, that doesn't appear to be something that will change in the near future despite a somewhat bumpier trading environment. 

The bullish price action in performance sports apparel maker Under Armour (NYSE: UA) caught my eye as it moved back toward its all-time highs after finding good near-term support in September.

While the stock's year-to-date rally has been significant and its medium-term slope looks awfully steep, if growth stocks continue to be chased into the fourth quarter, then UA stands a good chance of being bought on dips or breakouts.

Depending on the market environment, stocks trading with steep slopes can continue to rise, however uneasy it may make a trader to jump on such vertical climbs. Steep rises in stock prices often lead to meaningful and occasionally vicious moves lower, which set up some great short-side trades.

Today, I would like to look at the other side of the coin -- hopping on the bandwagon and taking advantage of the "irrational" climb. 

When doing so, it is imperative to have clear lines in the sand by way of moving averages, trendlines and lateral support areas, which, if snapped, give us a clear signal to at least temporarily get out of the stock.

Looking at the multi-year chart of UA, note how each break of the major resistance (red) lines over the years caused the stock to accelerate to the upside. At the same time, UA does not lack for violent but healthy mean-reversion moves. Just look at the 35% drop in the summer of 2011 or the roughly 25% drop in the fourth quarter of 2012, which took the stock back to an important support line, its 100-week simple moving average (blue line). 

In time, UA will likely retest its 100-day simple moving average again in a meaningful retracement. In the meantime, staying the trend could allow traders to profit from another pop higher.

On the daily chart below, the stock's 21-day simple moving average continues holding as support like a charm. This moving average has not been broken since late June, and even before that was continuously respected by the stock. Most recently, on Sept. 16 and Sept. 23, UA again bumped into this moving average, which both times held as firm support.

After a multi-week consolidation pattern, UA staged a big rally along with the broader market in early September.

On Friday, UA broke past a near-term resistance line near the $79 mark, pushing back up toward its all-time daily closing high near $81. While Friday's pop came on the back of an earnings beat by Nike (NYSE: NKE), on the oscillator/momentum front, stochastics, relative strength index (RSI)  and others signal more upside ahead.

Action to Take -->

-- Buy UA on a breakout above $80

-- Set stop-loss at $77.50

-- Set initial price target at $84.50 for a potential 6% gain in four to six weeks

This article originally appeared at ProfitableTrading.com
Chart Says This Momentum Stock is Due for Another Quick Pop

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Serge Berger does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.