San Francisco-based software analytics firm New Relic ($NEWR) is a relatively new IPO from late 2014 with explosive potential. Continue reading to see why this stock is so hot.
With $NEWR forming a tight-base near the highs its two-year trading range, let’s walk through the charts of multiple timeframes to analyze the breakout setup.
The Big Picture
Many traders place too much emphasis on the daily chart timeframe, with very few looking at monthly, or even weekly charts.
But this is a mistake because longer-term charts provide so much “big picture” insight.
The monthly chart of $NEWR really shows just how tight the price action has been as of late, with two months in a row of tight ranged trading prior to this month’s breakout.
Last month’s action produced an inside candle as well.
Whether a daily, weekly, or monthly chart, an inside candle shows price contracting, which leads to price expanding (although not always in the desired direction):
Now that we have a stock that is trading near the highs of a two-year range, let’s take a look at the weekly chart to see if we can identify any valid basing patterns.
If there isn’t a valid base in play, then we are forced to sit on the sidelines and wait for one to develop.
Three Bases
Looking at the weekly chart below, we see three bases that have formed since late 2015.
The first base at point A was a bit too wide in pulling back nearly 50% off the high.
The second base at B was much more healthy correction off 25% off the high, but note how the right side of the pattern ran from the lows of the base to the highs in just a few weeks.
That sort of rapid run up is not ideal. Note that the price stalled at the prior high before reversing lower.
The current base at C has the most potential, only pulling back less than 20% off the highs while holding above the rising 10 and 40-week moving averages.
Note the tight closes from week to week before breaking above $37.50, which is a sign of accumulation:
With a tight weekly base in play and a monthly that is potentially ready to set a new all-time high, $NEWR is an ideal buy candidate, so let’s find an entry.
Off To The Races
In early April, we were monitoring $NEWR for a potential breakout entry around $37.50.
That breakout did arrive on April 5 in the form of a 3% opening gap up that closed with a 5% gain.
Volume confirmed the price action as it was 260% greater than average (bullish day to say the least).
After stalling at $40, $NEWR began to pull back in, closing in on the 10-day MA.
However, since the breakout was so strong, we decided to place a buy limit order above the rising 10-day MA on April 11, which triggered at $38.60:
After a few days of light volume chop, $NEWR sold off with the market on April 13, but swiftly bounced back after closing in the top third of the day’s range and finding support at the breakout pivot.
The reversal action on an ugly down day in the market reveals $NEWR’s relative strength, which should be your main trading focus in the current market environment.
Because of its relative strength, $NEWR also has a good shot at becoming a new leading stock when overall market conditions improve.
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