One of the major manufacturers of wood-alternative decking, railings and other outdoor items made from recycled materials, Trex Company Inc. (NYSE: TREX) seems to be gearing up for a price surge according to its latest charts.
#1 Symmetrical Triangle Pattern Breakout: A symmetrical triangle pattern has been formed in the daily chart as shown below. This is marked in pink color dotted lines. This pattern is usually formed when there is an indecision in the price movements and uncertainty among the buyers and sellers. It represents a period of consolidation before the price breaks out or breaks down. Currently, the stock has broken out of the symmetrical triangle pattern. This usually signifies the start of a new bullish trend.
#2 Falling Wedge Pattern Breakout: As you can see from the daily chart, the stock was forming a falling wedge pattern for the past several months. It has typically taken support at the bottom of the wedge before bouncing back. This pattern is marked as purple color lines. The stock has currently broken out of this wedge, which is a possible bullish sign.
#4 MACD above Signal Line: The daily chart shows that the MACD line (blue color) is above the MACD signal line (orange color). This is a possible bullish setup.
#5 Bullish RSI: The RSI is currently above 50 and moving higher, indicating the strength of the current upmove.
#6 Above Double Bottom Breakout Support Level: The weekly chart shows that the stock is currently trading above the breakout level of a double bottom pattern, which is shown in pink color. This seems like a good area for the stock to bounce higher.
#7 Above MAs: The stock is currently trading above its 50-week as well as 200-week SMA, indicating that the bulls are currently in control.
#8 Bullish Stoch: The stochastic is currently moving up from oversold levels, and made a bullish crossover. This is a positive indication.
Recommended Trade (based on the charts)
Buy Price: If you want to get in on this trade, you can purchase half the intended quantity of shares of TREX is it trades above yesterday’s close. This translates to a price of around $84.80.
The rest of the shares can be purchased when the price closes above the first target of $90
TP: Our first target price is $90 and the second target price is $100 in the next 4-6 months.
SL: To limit risk, place a stop loss at $81.30. Note that this stop loss is on a closing basis.
Our target potential upside is almost 6% to 18% in the next 4-6 months.
For a risk of $3.50, our first target reward is $5.20 and the second target reward is $15.20. This is a 1:2 and 1:4 risk-rewards trade.
In other words, this trade offers nearly 2x to 4x more potential upside than downside.
Risks to Consider
The stock may reverse its overall trend if it breaks down with high volume from the symmetrical triangle pattern. 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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