Amsterdam-based Tornier NV (TRNX) is a global medical device company making orthopedic reconstructive products. This week, it exploded higher from a two-month trading range, rallying 6% in just two days' time. However, charts reveal that the short-term breakout was also an intermediate-term breakout, and that suggests it has several weeks of upside yet to come.
TRNX is up more than 33% since its Aug. 6 low. On Aug. 7, a JPMorgan Chase (JPM) analyst upgraded the stock from "neutral" to "overweight," and raised its price target. The stock soared that day, but made little progress for weeks afterward.
But as mentioned, TRNX broke out from that flat range this week and now appears to be on the move with the next leg of its rising trend.
TRNX traded near $30 in early 2011. While I cannot forecast it getting back to that level any time soon from its recent price just shy of $21, I do see this stock trading back at $24 within a few weeks, which would be a nice gain of more than 15%.
Here's how I arrive at that number. First, after breakouts, stocks tend to move in integral increments of the heights of the patterns from which they emerge. For TRNX, the short-term pattern -- a trading range or rectangle -- was between $18.55 and $20, rounded to the nearest nickel. Therefore, the pattern height was 1.45 points, and we project that up from the breakout point to get our first target of $21.45.
Should the stock move beyond that level, we add another 1.45 points to get $22.90, and beyond that, $24.35. I hesitate to forecast beyond three integral multiples of any pattern, and indeed, the third target often comes with a twist of some kind. But the point is that we can use chart patterns to help forecast where a stock might go following a breakout.
Next, we look at TRNX's intermediate-term pattern called a double-bottom or "W" pattern. The stock bottomed at $15.50 (rounded) in November of last year and again at $15.30 in June. That is close enough to consider them twin lows forming the bottom of the pattern. When prices rise above the high between the lows -- the middle peak of the "W" -- then the pattern is completed and the stock is expected to continue higher.
We can apply the same measuring technique of taking the pattern height of 4.3 points -- the high of $19.60 minus the low at $15.30 -- and adding it to the high to get a target of $23.90. That is close enough to the target for the short-term pattern to make $24 a solid upside objective.
Measurements here in two different time frames yield similar results and make for a higher confidence trade. And for more advanced chart watchers, it does not hurt that $24 is also a near-perfect 61.8% Fibonacci retracement of the entire 2011-2012 decline.
Recommended Trade Setup:
-- Buy TRNX at the market price
-- Set stop-loss at $19
-- Set price target at $24 for a potential 15% gain in eight weeks
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