NEW YORK (TheStreet) -- Reynolds American (RAI) surged 6.3% on Tuesday after the tobacco company reported better-than-expected results for the second quarter -- and the stock could be headed even higher.
Reynolds American's positive news and guidance hike sparked a powerful breakout gap that lifted the stock past last week's high. The early momentum remained in place all day as shares moved steadily higher. By the settle, the stock had attracted its second heaviest upside volume since March of 2014.
Tuesday's ramp extended the stock rally off June's low to over 18%. This impressive move stalled a bit as it returned to heavy resistance near the April/May highs. The brief pullback had ended by the beginning of July, and shares quickly returned to rally mode.
On July 16, Reynolds American took out the $78 area, which now includes the June high, putting in new all-time highs in the process. Volume remained very light as shares drifted higher over the next five days, indicating that the resistance zone that had capped three straight monthly highs was completely cleaned out. This put Reynolds American in a very bullish position ahead of earnings.
Reynolds is now set up very well for more upside. Despite the big rally off June's low, shares are still well below overbought levels. If a pullback is needed, which is very likely in the near term, the stock now has solid support underneath.
A fade back down below $81 would create a low-risk entry opportunity for interested investors. Just below this level is last week's high at $80.56 as well as Tuesday's powerful breakout gap at $79.77. This area will offer sturdy support if needed.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.