Last week, Money Morning Quantitative Strategist Chris Johnson nailed the breakout in Installed Building Products (NYSE: IBP).
And there's still time to cash in on the stock's breakout. Today, we're breaking down the stock chart to show you exactly where it's heading next, including how you can maximize profits on it.
The technical indicators are lined up for the move higher, and he forecasts that the stock will reach $50 per share in short order. That's about 6.7% from Monday's closing price, which is not a bad payday.
The question is how we can take this projected 6.7% gain and turn it into something really meaningful. The answer is leverage, and the way we do it is with options.
But first, let's take a look at the chart to see just what made Johnson so bullish on IBP…
How to Read a Stock Chart to Find Profits
When Chris first put out his prediction, IBP stock was trading in between its two major moving averages. Traders use the 50-day and the 200-day averages as guides to tell them the direction of short- and intermediate-term trends. While it's become rather cliché, it really is true that the "trend is your friend."
That's why it is so important to trade with the trend and not against it.
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Moving averages look at the past string of closing prices, add them up, and divide by the number of days. If the average is moving higher, then the trend in that time frame is rising.
Nothing mysterious there.
Traders also anticipate that these averages will act as speed bumps for the stock's movements, and that's what happened here. The 50-day average was rising, but the stock stalled when it reached the 200-day average.
In other words, the two averages were converging on the stock price, creating a scenario where the stock would break out higher or lower.
Johnson correctly identified the momentum was showing a breakout higher, and that's exactly what happened. Take a look…
Chris was able to spot this breakout by looking at other trends on the chart, and the most important was falling, or bearish trend from January 2018.
Remember, that's when the entire market initially peaked.
This is where it gets fun. Chris noticed the trend line guiding the stock lower last year met the 200-day average, just as the 2019 rising trend stalled. But just a few days earlier, the stock began to outperform the S&P 500 for the first time since it peaked in early 2018.
And he used the same analysis to find the stock's next price target: $50 a share.
Again, the chart shows us the price level that acted as a decision point in the past. While simply looking at the past action does not give us real information, understanding what was going on at that price does.
In this case, the $50 level acts as a magnet, regardless of which way the trend was pointing. The market remembers these magnet prices, called support and resistance, and traders tend to take action when they arrive.
That means we can expect supply to increase at that price as traders wait for maximum profit before closing out their winning trades.
Now, you can profit by simply buying shares of IBP and book a tidy 8% profit as the stock's momentum propels it higher.
But you can supercharge your profit potential with options…