With the market roaring back to life in recent months investors are facing a dilemma that hasn't been on their minds for some time: how to deal with stocks that have had a good run-up but show the promise of continued growth.
This week Paul Ash, Victorian president of the Australian Technical Analysts Association, is focusing our attention on one such company, Super Retail Group. The company was trading on a flat trajectory until around last September when things turned upwards.
The upward move developed into a strong rising trend channel to February this year. Then the uptrend steepened, with the price spiking from $10.50 to above $12 and breaking through the top of the rising-trend channel. The overall share price rise in the past 12 months has been a whopping 67 per cent.
The question now presented is whether there is further growth potential for the stock. Ash says that the latest breakout to above $12 would normally be seen by technical analysts as a possible end to the uptrend because, after such a steep rise breaking through an already rising trend line, share prices tend to take a breather and go into a consolidation period.
This could be around current levels or could involve a retracement back to the $11.50 level, where it broke through the top of the rising-trend channel.
Super Retail has a pretty convincing set of fundamentals, reporting a 74 per cent profit rise in the six months to December on a sales rise of 37 per cent and pre-tax earnings up 62 per cent, with most areas of the business performing well.
Super Retail Group is a retailer of car and leisure products through 580 stores in Australia and New Zealand. Store brands include Rebel Sports, Ray's Outdoors, Supercheap Auto, Amart Sports, BCF Boating Camping Fishing and Goldcross Cycles.
Given that strong underlying performance, Ash says there might be further upward momentum in Super Retail and the current pull-back from $12.34 to levels of $12.05, after falling below $12, last week might represent the bottom of a correction. But if the stock falls further and goes down through $11.50 it could suffer a severe correction, losing up to 50 per cent of the last year's gains before turning up again.
So those considering buying because they believe the momentum might continue might like to put a stop loss in just below $11.50 to make sure they aren't caught by any downward breakout. Any prolonged move to below $12 would be enough to throw open to question the "blow-off", or upward breakout, from the rising-trend channel, Ash says.
This column is not investment advice. email@example.com