The well-known remanufacturer, manufacturer, and distributor of automotive aftermarket parts, Motorcar Parts of America, Inc. (NASDAQ: MPAA) seem to be poised for a price surge as per its latest charts.
#1 Double Bottom Pattern: From the daily chart of MPAA, we can see that the stock is currently forming a Double Bottom pattern. This is marked in the daily chart in orange color. A double bottom pattern is a strong bullish pattern and indicates a possible upmove in the short term.
#2 Stochastic –Price Bullish Divergence: There is a bullish divergence between Stochastic and price. While the price formed a lower low, Stochastic formed to a higher low. This is marked as blue dotted lines in the daily chart. The %K line of the stochastic is also above the %D line. These are all bullish signs.
It is currently above -50 and moving further up, indicating bullishness.
The stock had formed a hammer on July 2, 2018 on the daily chart and then formed a bullish candle soon after on July 3, confirming the possible reversal of the stock.
#4 Falling Wedge Pattern: As you can see from the weekly chart, MPAA has been trading within a falling wedge pattern during the past few weeks.
This is marked in pink color in the weekly chart. Currently, the stock is near the bottom of the falling wedge pattern. A Falling Wedge Pattern is a bullish pattern. Once the stock moves up and breaks out from it, it has the potential to move further up.
#5 RSI –Price Bullish Divergence: The weekly chart shows that there is a bullish divergence between RSI and price. While the price had formed a lower low, RSI had formed to a higher low. This is marked as blue dotted lines in the chart. The RSI is also near oversold levels. This indicates that an upmove may be imminent.
#6 CCI moving up: The weekly chart shows that the CCI is below -100 and moving up, indicating bullishness.
Recommended Trade (based on the charts)
Buy Levels: If you want to get in on this trade, you can purchase the shares of MPAA at the current price of $19.26.
TP: Our target prices are $25 and $30 in the next 4-6 months.
SL: To limit risk, place stop-loss at $17.40. Note that stop loss is on a closing basis.
Our target potential upside is 30% to 56% in the next 4-6 months. For a risk of $1.86, our target rewards are $5.74 and $10.74. This is a nearly 1:3 and 1:6 risk-reward trade.
In other words, this trade offers nearly 3x to 6x more potential upside than downside.
Risks to Consider
The stock may reverse its overall trend if it breaks down from the falling wedge and double bottom pattern support with a high volume. The sell-off of the stock could also be triggered in case of any negative news, overall weakness in the market, or any regulatory changes in the sector.
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