This week on CNBC’s Mad Money, Jim Cramer was talking about different stock plays that can relate to the NCAA March Madness basketball tournament. In particular, pizza plays Dominos (DPZ) , Papa Johns (PZZA) , beer play Molson Coors (TAP) , and sports bar/restaurant Buffalo Wild Wings (BWLD) . Putting the companies into a “Final Four” of sorts, Cramer took a look at the technical charts and the winner was…BWLD.
The reason? Each company is strong on its fundamental and technical merits, but “B-dubs” was victorious because its chart has formed a “cup & handle” pattern, which is a very reliable continuation pattern for an uptrending stock. Take a look at the chart and you can see where a cup and handle gets its name:
After a run to a high around $151, BWLD traded sideways from December to early in January before a selloff to find a base at $130. As the stock price sat on that support level, volume was decreasing, indicating that the selling pressure was subsiding. As the price per share started to rise again, the right hand side of the “cup” was formed. Once the stock price met the resistance again at $151, the price moved sideways, forming the “handle” portion of the pattern. The target price for a cup and handle pattern is the depth of the cup from the resistance point ($151) to the bottom of the cup ($130), meaning that $21 would be added to the breakout of resistance for a pattern price target of $172 (or somewhere thereabouts).
BWLD breaking resistance on Tuesday should be the start of the movement towards the price target. The movement on Friday at the time of this writing (candle highlighted in green) shows the strong move that BWLD is making on Friday as of 12:59 PM EDT.
Now look at the Pozen (POZN) chart. The first is the chart from March 17 when I was discussing POZN with a quant trader friend of mine, Doc (www.whattolearn.com). His quantitative analysis of the chart is what brought POZN to my attention as he sees a potential breakout as POZN is breaking a synthetic trendline. I was going to post the analysis at that point, but left it alone. When I saw the rerun of the Cramer show this morning, I decided to pull it out of the "unused" folder on my computer.
From any perspective, the chart has made a great move since rising from a support around $4.60 in November. At first, I was asked about the chart forming a flag pattern. The above March 17 chart incorporates my thoughts on that. From a technical analysis perspective, the chart started forming a large flag pattern when it broke resistance at $5.40 while making a move off the base. The top of the flagpole was at $8.99 (actually marked as $9 to keep round numbers) on the annotated chart above.
For a flag, technicians use the height of the flagpole to determine a price target. For POZN, the consolidation from the peak of the flagpole is called the “flag” (drawn in blue). The resistance point that would symbolize a breakout of the pattern is the top trendline of the flag, meaning it was being broken on February 10 when the stock price moved through the trendline at approximately $7.80. This point is circled in blue. The height of the flagpole is $3.60, meaning that the price target would be $11.40 ($7.80 + $3.60).
Generally speaking, I look for the breakout portion of the flag to be rising more quickly than the movement being seen in POZN since the trendline break. It’s still trending up like it technically should be, so it’s not inaccurate to say the flag breakout is in effect still. However, I also looked at the chart as possible forming a cup and handle continuation pattern. This is drawn in purple. In order for this pattern to form, the stock price will meet resistance somewhere around $9.00 and then trend sideways or pullback some to form the “handle.”
That is exactly what has happened only, with the resistance established at $8.75.
I will say that the “rounded bottom” is not as crisp and well defined as in the BWLD chart, but the pattern is forming. The consolidation of the handle can last several weeks and actually taper back in value some, but it is a handle just the same.
So with POZN, the price target for the pattern is again the depth of the cup, ($8.75 – $7.38 = $1.37) + the breakout point ($8.75) to equal at least $10.12. That’s a target a little less than the flag pattern, but still equates to a 15 percent upside and the highest level for POZN in 4 years and I think it's better to take a conservative approach and see how it goes. Incidentally, for those that would like to call the breakout point the recent high of $9, the price target actually increases to $10.66.
Point being here that POZN is still a chart to keep an eye on as it has risen from $1.76 in late 2011 to current levels and establishing a solid uptrend. In the short term, as long as the 50 day moving average holds as support, the chart is maintaining a very bullish look. For those interesting in technical analysis, take a look at the 10-year weekly chart and you will see that if the chart does meet resistance around $10.50, it could be making a huge inverted head and shoulders pattern.