Xilinx Charts: Breakout on Tap

Xilinx(XLNX Quote) has the potential for a significant breakout in the coming weeks and months. That breakout would definitely be a signal to own this stock if it happens.

The past couple of days, we have looked at the end products in the list of companies that Jim Cramer has focused attention on, code-named the mobile Internet tsunami. (So far, we've looked at Apple and Palm.)

Today, we drill down on a chip company, Xilinx, which makes many of those components that end up in your shiny handhelds.

XLNX, like yesterday's focus, Palm, has some nice characteristics. If you look at a very long-term chart of XLNX, you can see a multiyear descending wedge pattern. The recent price action took XLNX to the top of that large wedge where the supply line is thick. What do I mean by supply line?

In the case where prices plunge (as they did last year), a supply line develops a multitude of stockholders who are left holding the bag. On the chart below, you can see the supply line coming in at the $22-to-$25 area. Last fall, when stock prices plunged, selling volumes expanded, which left many trapped at higher prices.

As prices work their way back up to those levels, the trapped look to escape and they eagerly sell to get out even. The desire to break even is a huge factor, and it is one you never want to overlook. Trapped losers always wish to get out even. These sellers will hold for months and sometimes years to be able to escape for no cost. Little do they realize that they have already incurred a huge cost for holding those shares for so long.