The telecommunications equipment company headquartered in Huntsville, Alabama, ADTRAN, Inc. (NASDAQ: ADTN) seems to be getting ready for a price bump as per the latest charts.
Bullish Move – Chart Indications
#1 Rising Wedge Upward Breakout: As you can see from the daily chart of ADTN, the stock had been forming a rising wedge pattern during the past few weeks. This is marked as purple color lines. The stock has currently broken out of this rising wedge pattern. An upward breakout from a bearish pattern like rising wedge pattern implies that the stock may move higher in the short term.
Daily Chart – ADTN
#2 RSI Strong: Relative strength index (RSI) is currently above 50 after moving up from oversold levels. This indicates the strength of the current upmove.
#3 RSI – Price Hidden Bullish Divergence: In the daily chart, there is a hidden bullish divergence between RSI and price. This is marked as blue dotted lines. While the price formed a higher low, the RSI formed a lower low. This is typically considered as a potential buy signal as it indicates underlying strength.
#5 Bullish Stochastic: The %K line is above the %D line in the stochastic, indicating bullishness.
#6 Bullish MACD: In the daily chart, the MACD (light blue color) is currently above the MACD signal line (orange color).
This indicates a possible bullish setup.
#7 IH&S Breakout: As you can see from the weekly chart of ADTN, the stock has recently broken out of an Inverted Head and Shoulders (IH&S) pattern. This IH&S pattern is marked in the chart in orange color. An IH&S pattern is a strong bullish pattern and indicates that the stock may move higher in the short term. Typically, a stock corrects back to the breakout level of the IH&S pattern before resuming its upmove.
Weekly Chart – ADTN
#8 MACD Above Signal Line: In the weekly chart, the MACD (light blue color) is currently above the MACD signal line (orange color). This indicates a possible bullish setup.
#9 Bullish Stochastic: The stochastic is moving up. The %K line is also above the %D line. All these indicate possible bullishness.
Recommended Trade (based on the charts)
Buy Levels: If you want to get in on this trade, you can purchase half the intended quantity of shares of the ADTN at the current price of $18.55. The rest can be purchased if the stock corrects to the breakout level of the rising wedge pattern, at around $17.
TP: Our target prices are $24 and $34 in the next 4-6 months.
SL: To limit risk, place a stop loss below $16.80. Note that the stop loss is on a closing basis.
Our target potential upside is 29% to 100% in the next 4-6 months.
- Entry at $17: For a risk of $0.20, our first target reward is $7 and the second target reward is $17. This is a nearly 1:35 and 1:85 risk-reward trade.
- Entry at $18.55: For a risk of $1.75, our first target reward is $5.45 and the second target reward is $15.45. This is a nearly 1:3 and 1:9 risk-reward trade.
In other words, this trade offers 3x to 85x more potential upside than downside.
Risks to Consider
The stock may reverse its overall trend if it breaks down from the lower end of the rising wedge pattern with 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.
Happy Trading!
Tara
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