Monster Beverage Corporation (MNST), distributor of the popular Monster Energy Drink, saw massive gains from its late 2008 low. But after peaking in June 2012, the ensuing slide was choppy, to put it mildly. MNST finally stopped bleeding in late 2012, and the stock was able to consolidate.
In recent months, this consolidation led to increasing buying pressure that has pushed the stock up to an important resistance point. As a result, I am now eyeing a long-side trade setup.
In order to understand the importance of the November 2012 bottom and the resistance point to which the stock has since rallied, we need to look at the multi-year chart with weekly increments shown below, which dates back to 2008.
Off the November 2008 bottom up to the highs in June 2012, the stock rose an amazing 660%. Trend followers, who seemingly hop on the bandwagon regardless of slope or existing duration of a trend, made money as the stock skyrocketed.
Like many cult stocks that trend followers chase, MNST took its already steeply uptrending chart to a vertical ascent in January 2012. The stock finally succumbed to gravity during the second half of 2012, and the steep rally gave way to a sharp correction. MNST dropped by about 50% in just over four months, bottoming out in late October/early November.
More importantly, as often happens when a cult stock falls out of fashion with the crowd, MNST finally found support at the lower end of its longer-standing trading channel. Put another way, after a temporary spurt of insanity in the first half of 2012, which took the stock vertical for close to six months, mean-reversion set in. MNST then went on a price discovery journey that ended exactly where it should have from a longer-term point of view: the bottom of the multi-year uptrend and at roughly the 50% retracement line of the entire rally from the 2008 lows up to the June 2012 highs.
During the past seven months since the early November 2012 bottom, the stock has traded in a more lackluster fashion. But it did make a higher low in early March, which in recent weeks led the stock to push higher into a key resistance area. The resistance area sits between $58.70 and $59.50, and represents an exact 50% retracement of the nasty correction off the June 2012 highs.
On Tuesday, June 4, the stock broke past this resistance area, and did so on much higher-than-average volume of 5.6 million shares. This resistance dates back to September 2012, and there appears to be very little further resistance until the $67 area.
I don't expect the stock to rise toward $67 in a straight line (Wednesday's trading action is evidence of that), but barring any significant bearish reversal in coming days, the odds now favor a continued ascent on potentially accelerated momentum.
Recommended Trade Setup:
-- But MNST at $59.50 or above
-- Set stop-loss at $57.20
-- Set initial price target at $67 for a potential 13% gain in 4-8 weeks
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