Wednesday, March 9, 2011

Travelers Companies - A Decade Long Breakout

Traders spend a lot of time getting caught up in tick-by-tick price movements. But every now and then I like to step back and take a longer term view. I find using monthly charts work well for this purpose as they help me ignore the noise and see the bigger trend.

In the case of Travelers (TRV), looking at the daily chart shows a stock that has clearly been in an uptrend since last summer.

But almost every stock in the S&P500 has rallied since the summer. It's not until we take a look at a 10-year monthly chart that we can truly appreciate the significance of the break above the 57-58 level.

The break above 57-58 represents not only a break above the 57 high reached in 2007, but also the 57.50 high reached way back in 2000. It also confirms a monthly cup and handle breakout pattern.

I find these monthly breakout patterns to be much more reliable than shorter term breakouts, as more often than not they represent significant long-term positive developments within the company.

When seeing monthly breakout patterns like this you should only consider being long or flat the stock. There is nothing wrong with trying to trade around a long position like this, but shorting a stock in a major multi-year breakout is usually not a great risk/reward trade.

I went long TRV at 59.06 on Tuesday on the pullback from the 61.15 high seen in February. Technically the price could still pullback further to the 57-58 area without changing this bullish view. The long-term target is about 85 dollars.

I have seen a number of similar breakouts over the past month and will discuss some of them in a future blog post.

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