Another breakout trade is shaping up in shares of large-cap drug maker Actavis (ACT). Actavis has been trading within a rectangle pattern for the last few months, bouncing between a horizontal resistance level above shares at $90 and a horizontal support level below shares down at $82.50. Yesterday's push through resistance is sending a buy signal for traders today.
With any technical pattern, it's critical to think in terms of buyers and sellers -- not shapes. After all, triangles, head and shoulders patterns and the like are a good way of describing what's happening on a chart, but they're not the reason why it's tradable. Instead, that all comes down to the supply and demand caused by those buyers and sellers.
The horizontal resistance level at $90 is a place where a glut of sellers has been willing to step in and put a ceiling in the stock. The breakout means that increasingly eager buyers have absorbed all of the excess supply of shares sitting at that level -- and without that barrier in place, shares could rally much higher than that.That's why it makes sense to buy ACT now that sellers are nowhere to be found -- just keep a tight stop.
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