Setting Up

If any of you saw James Cameron’s film, Avatar and were blown away by the graphics and visual effects, then you have seen what Autodesk’s software can do in the hands of experts. Centered smack in the middle of the red hot technology sector, Autodesk’s stock, ADSK, is setting up for a breakout to all-time highs.

As you can see in the chart of ADSK below, price sits well above a rising 200 day moving average and is consolidating just under the $139 resistance zone. Each of the past 3 attempts buyers tried to push through that level it was rejected, indicating an overwhelming supply available for sale.  On the positive side, these past 3 months of sideways chop, a nice-looking cup and handle pattern has developed. A confirmed breakout and hold above the current $139 resistance points to an upside target in the area of $155.

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Cup and handle patterns that have their handle bottoms no greater than 50% of the depth of the cup provide higher probability setups, this one is slightly greater. More importantly shallow handles provide a much higher reward to risk ratio. In the case of this ADSK opportunity, using the handle bottom as the exit point if wrong, the ratio sits at 1.7 (meaning a $1.70 return for every dollar invested). I like the setup but don’t like the ratio as it is less than my preferred target of 3. When it comes to a less than perfect setup, an investor has 3 choices 1) deviate from the investment plan (accept a ratio less than target) 2) move on to the next opportunity or 3) tighten up the exit point.  Hmmm.  Decisions. Decisions.