Tuesday, May 25, 2010

Autozone (AZO) makes a new All-Time High

As soon as the opening bell sounded this morning the major indices were deep in the red. I was watching the list of new 52-week highs and noticed Autozone (AZO) had gapped higher. I recognized AZO since it's been on the blog several times as it made runs to new highs. More than a year ago it benefited from the "pooring of America" trade based on the idea that the economy is going downhill and more Americans will be forced to fix their own cars rather than buy new ones. Trader Mark summarized this idea in this post from March 2009. Anyway, with dollar stores hitting new highs last week (and Family Dollar, FDO, again today) there is more confirmation that the "profit from poverty" trade is working again. I'm generally not a fan of speculating in a choppy market and there are plenty of traders that I greatly respect who are saying it's best to step aside for a while or be defensive here (Brian Shannon, Dr. Wish, Trader Mike, and Decision Moose to name a few). Here are a few charts of AZO over multiple timeframes and with different indicators:

First, a relatively short-term chart from Finviz that shows this up-move. Notice that AZO made a new all-time high about 2 months ago and then moved sideways, working off overbought conditions and forming a base. In that time it tested and found support around the 50-day moving average and the trendline. Last friday was the most recent test and today it followed through by breaking to new highs on well above average volume. Because AZO is coming off of a nice base it is not overbought (RSI 14 is at 67) even though it has had a big move. Thus it has upside potential. For what it's worth Autozone currently has a Piotroski score of 7 (good) a forward PE of 11 and some analysts have a price target of 200, all of which reinforce the potential for more upside.


The price-by-volume bars on the left of this chart show that there is essentially no volume traded at prices between ~185 and 190. This "air pocket" is dangerous and is at risk of filling on the downside if AZO struggles.

On a longer time-frame the chart of closing price with a 7-ATR trailing stop and a Guppy chart show that anyone who bought AZO earlier in its uptrend (one of several) would still be riding it higher if they listened to the message of the price action. Note that the Guppy chart signal (buy when all short-term averages are above the long-term averages and vice versa) would have avoided the downside in the latter half of 2009 and got you back into the stock in December.

As always, I have no idea what happens next and that is just fine. I don't try to be a hero and pick the bottom or the top or predict the future. I just try to listen to the message of the market and the message from specific stocks and react accordingly. Go with the flow.

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