Eyes Peeled for a Breakout

 | Aug 02, 2013 | 9:00 AM EDT
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Broadwind Energy (BWEN) issued its quarterly earnings data Thursday, but Wall Street barely seemed to notice. Even though Broadwind has repeatedly popped up in my own scans for potential market gainers, the news wires have barely offered even a whisper regarding this company's expectations.

This firm is best known as a manufacturer of wind turbines. It reported a loss of $0.01 per share for the quarter, exceeding the consensus estimate for a $0.07 shortfall. Revenue totaled $51.36 million, which is short of analysts' $54.59 million expectations.

Demand has been falling across the board for the equipment and services the company provides, and energy is typically a market of high volatility. Still, the charts suggest that Broadwind should not be dismissed so quickly. August and September are typically strong months for the energy sector, and Broadwind is not the only company in the group showing emerging strength. The Energy Select Sector SPDR (XLE) is up 10.7% year to date after a Thursday gain of 1.6%. The fund is promising to try for a new 52-week high this month, as well. The iShares Dow Jones US Energy Sector (IYE) has also done well, as you can see on the chart below.

Meanwhile, Broadwind Energy is up 115.3% so far this year. Much of this is thanks to a strong but steady rally in the first quarter, though the stock has since fallen into a trading channel on the weekly time frame. In particular, the stock has shown steady back-and-forth action within the upper 50% range of the first-quarter rally.

In other words, the 50% level has acted as support for the weekly channel -- and this is key. Trading ranges that correct under this level have a more difficult time regaining enough strength to break above the prior highs. Although the initial correction off the March highs began quickly, that rapid pace of selling within the channel has diminished since April, with greater strength shown on the upswings than on the pullbacks.

Volume has also failed to support the position of the bears. Selloffs have been met with little notice, whereas latest rally on the daily time frame -- from June into July -- has seen volume begin to return, even despite a great deal of media attention.

That rally had offered an initial attempt to break higher, for a move back to the prior highs, but initial breakouts are notorious for their failed attempts. Broadwind had been testing the lows of the channel only a few weeks earlier, and it was trading midway within the channel just prior to the attempt, thus making a clean break even more difficult without a secondary pullback.

In any case, that secondary pullback began on July 17. I've been following the stock closely since then.

The ideal correction from a failed breakout will witness two waves of selling. The stock will hit support mid-channel, and then go for a second breakout. Given the company's looming earnings report, however, I wanted to wait this one out until today. I now feel that Broadwind is at a price point at which it could now manage another breakout attempt more successfully vs. the last one.

My only concern at these levels, from a technical perspective, is that the correction over the past several weeks has still been stronger than was the last segment of the rally into early July. This leaves the door open for a period of daily congestion, and another drop into the lower end of the weekly trading channel, before the correction is truly completed. But I don't believe that will be the case, so these levels seem to offer enough opportunity to begin building a larger position in Broadwind. I'm expecting a move not only back to prior highs, but to larger weekly resistance at $7.10 and $8, depending on the strength of the breakout.

The $3.95 level represents the current support on the weekly time frame, and the stock must hold above this level for that larger price pattern -- but $3.50 needs to hold in order for the smaller correction to remain valid. Should the stock break under it, that zone of support at the lower end of the channel, near $4, will serve as a magnet. But, as long as the breakout occurs by the end of August, I feel strongly that it will hit the lower end of expectations. I would suggest dropping down to the 120-minute chart for timing on your entry.

Broadwind closed at $4.91 Thursday.

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