The Allstate Corporation (ALL) provides property-liability insurance and other types of insurance. The stock, which suffered big losses during the financial crisis, has since bounced back strong. Overall, the stock behaves similar to many other insurance stocks, which is why I use it as a proxy to the insurance sector.
ALL continues to consolidate in a healthy fashion, thus the price action favors further upside. Only a setback large enough to break the two-year uptrend would raise a red flag.
Through the lens of Allstate's multi-year chart, the stock acted much like many stocks over the past six or so years. After the stock topped in early 2007, it began its descent in an orderly fashion, which ultimately led to a waterfall drop in September and October 2008. After a few more choppy months, the stock ultimately capitulated into a violent March 2009 low from where it staged a steep rally into an important April 2010 high, which took two and a half years longer to be surpassed.
Even more important than the April 2010 high, however, was the stock's October 2011 low, which qualified as a significant higher low versus the March 2009 capitulation low. From the higher low, the stock took less than 12 months in a steady incline to hit its April 2010 highs near $35.
After a few months of consolidation and coiling up, ALL finally staged a clear breakout past resistance in August 2012, which paved the way to the current rally.
On the daily chart, you can see how well the stock bounced back and forth in the uptrending channel, which it has done since its higher low in October 2011. Even as the stock pushed outside of the channel in April of this year, it didn't take long for shares to mean-revert to the lower end of the channel. ALL has a strong correlation to the broader market, so it shouldn't be surprising that it found a recent bottom in June from which it proceeded to bounce hard.
In early July, ALL successfully pushed to a new, year-to-date high. But after a week or so of pushing higher, it settled into its current consolidation phase. This recent consolidation area spans from $50.75 on the lower end to $52.50 on the upper end. Also note that shares are currently trading at the upper end of its longer-standing uptrend, which limits the near-term upside potential of the stock.
The company reported its latest earnings on July 31, and the stock reacted positively with a 2.5% jump the following day. This also brought the stock right back to the upper end of the recent trading range.
From a momentum point of view, the stock looks to have upside potential left. However, I don't believe that alone is an actionable catalyst. Not until the stock manages to break above the recent trading range, with a daily close above $52.50, do I consider the stock to be ripe for a long side trade.
Recommended Trade Setup:
-- Buy ALL on a daily break above $52.50
-- Set stop-loss at $51.30
-- Set initial price target at $55 for a potential 4.8% gain in 4-8 weeks
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