One of the hardest things for investors is to determine a stock target
price. Once a stock does breakout from a favorable chart pattern the
question is how high will it go? That is usually a very hard
question to answer.
There are a few things as an investor that you can look at to determine a stock target price.
These include previous resistance zones, longer term moving averages and
Fibonancci Retracement Levels.
Let's look at an example. Amazon (AMZN)
completed a longer term Cup over a 2 year period and then developed a 4 week
Handle (H). In this case my projected longer term stock target
price for AMZN would have been in the upper 40's which coincided with its
longer term 38.2% Retracement Level calculated from the early 2000 high to the
Summer 2001 low. Notice that AMZN broke out of its 4 week Handle in April
of 2003 and than rallied up to its 38.2% Retracement Level (point A) where it
began to encounter some resistance.
At this point as an investor the question becomes do you lock in profits or
do you hold for a longer term gain? One strategy you could have used was
to sell half of your initial position near the 38.2% Retracement Level and then
continue to hold onto the other half and raise your trailing Stop to just above
the original Pivot Point which was around $28. That way if AMZN
had sold off down the road you still would have broke
even or had a small gain in the other half of your position.
Meanwhile as AMZN traded sideways near
its longer term $38.2% Retracement Level it formed another "Cup and
Handle" pattern. In this case the next potential target price for AMZN
would have been at its 50% Retracement Level near $60. Once AMZN
broke out in late September it quickly rose up to its 50% Retracement level
before stalling out again (point B). At this point if you had invested in
AMZN when it originally broke out in the upper $20's you could have sold the
remaining half of your position for a nice profit. If you had missed the
first breakout in the upper $20's and took a new position after AMZN broke out
of its second "Cup and Handle" pattern then you could have sold half
your position near $60 and then placed a trailing Stop just above the Pivot
Point which was near $48. In the future if AMZN can break above its 50%
Retracement Level then there is probably a good chance it will rise up to its
longer term 61.8% Retracement Level near $72 (point C). This is where I
would sell the rest of my position if AMZN
did rise up to the lower $70's down the road.
Knowing where specific longer term Retracement Levels reside can give
investors insight into a stocks potential target price
after it breaks out of a favorable chart pattern such as the "Cup and